Crypto as a pension strategy – Talk Business & Politics
This article should be helpful to fiduciaries seeking an understanding of how the virtual currency markets work in the context of retirement planning. Virtual currency is being embraced by several institutional investors, some of whom work with pension plans subject to the Employee Retirement Income Security Act of 1974 (ERISA).
Virtual currency or cryptocurrency (crypto) is a digital asset that can be exchanged freely without a central monetary authority such as a financial institution or government entity. Instead, cryptocurrencies are created using cryptography methods so that traders can make trades securely.
Cryptocurrency exchanges (eg Coinbase) are popular platforms where people go to trade. These platforms often provide their users with their own “wallet” – where traders can keep the private keys (passwords) that give access to their crypto.
Crypto is used to buy goods and services, but it is sometimes used to participate in software, including financial products.
A plan subject to ERISA must have a “named fiduciary” (usually an employer) who is responsible for the plan. The named trustee must carefully assign a certified “investment manager” (eg, a bank) to manage the plan’s investment portfolio and oversee the investment manager’s decisions regarding the plan.
More often, investment managers are asked about the advantages and disadvantages of virtual currency as an investment vehicle in retirement planning. Here are some of the main approaches to these risks specific to crypto.
Plans under ERISA must have all US-based assets. While there are certain exceptions for foreign currency, there is no such exception for cryptocurrency at this time. To comply with this ERISA rule, named trustees and investment managers should carefully review the crypto exchange platform (wallet) they wish to use and confirm that neither the trading platform nor the currency itself is based outside the United States.
Virtual currency’s most attractive feature – its non-regulation – is also a feature that gives it increased risk as an investment asset. Currently, it is not obvious which public agencies are primarily responsible for protecting the public in virtual currency exchange.
The Securities and Exchange Commission (SEC) appears to be leading the charge as a regulator. There have been some SEC crackdowns on crypto trading, including allegations of wire fraud against certain platforms. However, only an unclear number of virtual currency exchanges have been identified by the SEC as required to register under federal securities laws. The SEC maintains a list of its enforcement actions involving digital assets on its website.
While there are no clear guidelines for investors when it comes to assessing the legitimacy of a cryptotype or trading platform, investors are advised to confirm the veracity of the trading platform’s statements and/or engage legal counsel to decide, for example, on an initial coin. offering will be subject to federal securities laws.
The crypto market is vulnerable to unpredictable, complex security attacks. There have been reports of concerns about data breaches that have resulted in millions in losses for exchanges and their customers, and some victims have still not received compensation.
ERISA plan investors engaged in virtual currency should understand that at any time (due to hacking, for example), assets may become unavailable, trading may be suspended and the exchange may not offer to reimburse investors for any losses. Investors should therefore exercise care in choosing the crypto exchange they wish to use.
As noted above, it is necessary to consider US-based investments for ERISA compliance purposes. However, doing so may also ensure that the exchange will be subject to US anti-money laundering (AML) and customer due diligence (KYC) laws.
Michael Pollock is an associate with Wright Lindsey Jennings as counsel and represents companies and individuals in tax and business matters. The opinions expressed are those of the author.
