When I was in law school, a college friend of mine reached out to me to try and get me to start “mining” for “Bitcoin.” She said that it was the future. I should participate in this revolution. Use my cheap, college internet to help out this new society.
It seemed interesting and sci-fi-ish. However, I was skeptical, easily distracted, and decided to ignore her. I chalked up her insistence to “hacker stuff.”
I mostly forgot about it after that; though I did follow the bitcoin pizza transaction, the silk road fallout, and other mumblings.
Fast forward a few years later, Bitcoin went on its big 2017 bull run. and I thought about my friend. I sighed and decided that, even if I’d listened to her at that time, I would’ve likely lost my private key by that point anyway. So, even though we’d missed getting in on the ground floor and cashing in for a pair of matching lambos, there was no time like the present to start dabbling.
How do I protect my crypto?
Now that a multitude of cryptocurrencies have popped up and the cryptocurrency ecosystem has been through a few bull runs, we get called with, “How do I protect my crypto?” as a common question.
The value of the cryptocurrency market has been on a positive run in the last year and hopefully you’ve seen some good gains. As with any valuable asset, you want your cryptocurrency to be protected by your asset protection plan.[Quick side note here: I’m writing about protecting your crypto from potential lawsuits as part of an asset protection plan. An entirely different topic is protecting your cryptocurrency from loss. Either from you losing access to your wallet or someone hacking your online accounts and stealing your tokens.]
There’s a good chance you own and hold all your cryptocurrency in your personal name, either through an online account or personal ownership of the private keys to a wallet. The rule in asset protection, though, is anything you own personally, with some exceptions, can be taken by a creditor.
Let’s run through a typical scenario: you open an account on Coinbase in your name where you buy and sell cryptocurrency. If down the road you face a judgment resulting from a stupid lawsuit, a creditor could take that Coinbase account away from you or try and force you to sell the cryptocurrency to satisfy the judgement.
In order to have asset protection for cryptocurrency, the goal is to move your cryptocurrency account or wallet out of your personal name and into a protective entity like an asset protection trust or LLC. If you do this, you won’t have to (commit fraud) lie to a judge and say you lost your tokens in a boating accident.
Online Brokerage Account
As I mentioned, many people start out buying and selling cryptocurrency through a brokerage like Coinbase, BlockFi, Gemini, etc. In addition to trading, these companies will also store your cryptocurrency in your online account. This is similar to a traditional brokerage investment account service at the Vanguards of the world.
If you hold your cryptocurrency assets in one of these accounts, the process of transferring the account out of your personal name is fairly straightforward.
Your first step is to open an account in the name of your asset protection trust or LLC. These are typically referred to as “institutional” accounts. BlockFi, Coinbase, Gemini and many others offer these accounts. Once your new account is open, you can transfer your holdings from your personal account to your trust or LLC account. Be sure to check with your tax person to see if this transfer will be a taxable event.
For our clients, we typically have any LLC that holds valuable assets owned by their asset protection trust.
Hot and Cold Wallets
If you have a significant cryptocurrency balance, you might store those assets in your own wallet. This means you own and maintain the private key to your wallet (in contrast to an online account where a company keeps your private key).
Ownership of the private key to a wallet is generally considered ownership of the cryptocurrency associated to the wallet.
Here again, to have your cryptocurrency protected by your asset protection plan, you need to move ownership from your personal name and into a protective entity. You can accomplish this simply by properly documenting the transfer of the keys to the trustee of your trust or LLC.
This is a pretty thin paper trail for my liking though. Since cryptocurrency is a decentralized asset, my concern is the lack of proof of ownership that comes with a more centralized, traditional asset. What I mean by this is if you purchased all of your cryptocurrency with personal funds and then transferred it to an LLC, I would want more of a paper trail than a single assignment document.
A better paper trail would look like this: 1) have an LLC within your asset protection trust; 2) transfer money from the LLC bank account to the LLC cryptocurrency exchange account; 3) buy your favorite moonshot tokens, and; 4) transfer to the hot wallet or cold storage that was created or acquired by the LLC.
Another approach to protecting your cryptocurrency is to own them within a retirement account such as a 401k, IRA, HSA, etc. Depending on where you live, retirement accounts may be protected from creditors.
There are a number of companies that will allow you to invest in cryptocurrency within a retirement account. Feeling more ambitious? You can open a cryptocurrency trading account for an LLC that is owned by your self-directed IRA or 401k.
Be sure to get good advice and consult your accountant before making any of these money moves. Especially before messing with retirement accounts.
The LLC and/or trust you put your cryptocurrency in can have varying levels of protection based on how it’s set up, what state you live in, and how that LLC is owned. However, it’s better than the no amount of protection by owning a valuable asset in your personal name.
Making sure that you have the right entity structure will not only help you protect this valuable asset, but creating a protective plan can also help ensure that, if something happens to you, the right people can gain access to your accounts as well.
Colin Ley is an asset protection attorney and the creator of the PREP Trust® and Better LLC™. He is also the co-founder of LayRoots (along with with partner in life & business – Shreya Ley)
Being successful in America makes you a target for bogus lawsuits from shameless lawyers. We created an effective, asset protection solution, so you don’t have to worry anymore, happily knowing your family’s future is protected. Get started now by scheduling a free, 30-minute call at livemorecarefree.com.