It is estimated that over 36 million Americans own cryptocurrency – Bitcoin, Litecoin, Ethereum, or some other form of crypto altogether. (Even Dogecoin.) And if you’re one of these 36 million, then protecting your crypto assets should be a top priority.

This doesn’t just mean protecting yourself from scammers, such as those involved in the recent Twitter hack. It also means protecting your assets from creditors.
Scammers, whatever else can be said about them, are acting alone and outside the law… but if someone wins a judgment or settlement against you, they will have the might of the government backing them up, with all the legal resources that entails.

Unfortunately, crypto assets aren’t nearly as secure as many people think they are.

Why Crypto Assets Aren’t Safe

One of the most common reasons why people buy crypto is because they want to maintain their privacy. Blockchain transactions are anonymous, at least in the sense that transactions cannot be traced back to a specific individual, and this can make them hard even for top law enforcement officials to track (as the victims of the Twitter hack found out to their chagrin).

However, this anonymity will only get you so far.

If you lose a lawsuit or go into debt, then the courts will force you to disclose all relevant information about the property and currency that you owe… and that includes crypto. The fact that crypto transactions are anonymous on the blockchain is legally irrelevant; you will be required to disclose these, along with all the rest.

And as a result, these crypto assets will be just as vulnerable to seizure by the government as anything else you own.

Of course, you could just refuse to disclose your crypto assets – but this is fraud, not asset protection. Remember, asset protection, at least the kind that our firm can offer you, involves a set of legal strategies designed to keep your assets safe from creditors. And in most cases, when you attempt to defraud the government, odds are they’ll catch up to you eventually and things will go far worse for you than they would have. It’s just not a good idea.

Not only that, but the government has gotten a lot tougher on crypto in the last few years, and much better than it used to be at sniffing out people who try to skirt the rules. This isn’t the Wild West of the early 2010s anymore; you can’t expect to hide your assets in crypto to avoid paying taxes these days, and the same goes for hiding from creditors.

However, there are a number of legitimate asset protection measures that you can take to keep your crypto safe from the government. These steps are perfectly legal, if done properly, and can provide you with a great deal more protection than you would get from illegal and underhanded tactics.

How to Legally Protect Your Crypto Assets

Offshoring

One step that you can take to protect your assets in crypto is to move them offshore.

Unlike refusing to disclose your assets to the courts, offshoring them is – contrary to popular perception – legally permitted, so long as you file appropriate paperwork disclosing your assets to the IRS, and pay all relevant federal taxes.

So, what’s the benefit of offshoring? Well, many common offshore destinations have made themselves havens for foreign investments by greatly strengthening their asset protection laws. If a creditor goes to one of these offshore destinations, they will have to go through a set of extremely complex legal hoops which they would not face in the United States.

There are a couple ways that you can offshore your assets:

Offshoring a Trust

One way is to set up an offshore trust. Several jurisdictions exist for this, but the best one, with the strongest asset protection laws, is the Cook Islands, a small nation in the South Pacific.

There are a number of benefits to a Cook Islands trust:

• The Cook Islands have the legal institutions of a first world nation; their legal system is based off English common law and is closely linked to that of New Zealand.
• The Cook Islands do not recognize foreign judgments, so an American claimant will have to file a case of fraudulent transfer there if they want to receive any assets from the trust.
• Once a claim of fraudulent transfer has been filed, the claimant will have to surmount a series of difficult legal obstacles. Among other things, they will have to prove the claim beyond a reasonable doubt – a much higher standard of proof than is required for fraudulent transfer claims in the United States – as well as proving intent.
• The Cook Islands will not impose any new taxes on you.
• Information about any trust you create in the Cook Islands will be kept anonymous (which, if you have moved your assets into crypto because you value anonymity, will add an extra layer of protection).

No asset protection strategy is perfect… but setting up a Cook Islands trust guarantees one of the highest possible degrees of security. And if you want to move your crypto assets there, to do so may be as simple as to place the private key in a Cook Islands trust.

Furthermore, asset protection trusts can be set up in the United States, in jurisdictions such as Nevada that have more favorable asset protection laws than California does. A tradeoff exists here: your assets are still far less secure than they would be in a foreign trust, in part because they fall under the jurisdiction of the United States government. However, these trusts tend to be much cheaper. It depends on your personal needs.

Offshoring an LLC

Another type of offshoring involves setting up an offshore LLC. This can be done in the Cook Islands as well, but for the offshore LLC in particular, an even stronger jurisdiction is the island of Nevis in the Caribbean. You will receive many of the same benefits as you would from an offshore trust.

On top of that, you will receive an additional benefit, one common to all LLCs but enhanced by offshoring: the corporate shield of liability. Your personal assets will be protected from claims against the business. Conversely, your business assets will be protected from personal claims against you, unless the creditor receives a charging order… and getting an effective charging order is very, very hard in Nevis.

That, at least, is the lowdown on asset protection trusts and LLCs. There’s a lot more we haven’t said, so if you want to learn more, we encourage you to read further, or to give our firm a call to talk over personalizing your asset protection strategy. But these trusts are valuable tools, and when combined with crypto, they have the potential to be extremely effective.

Crypto: Currency or Property?

There is some controversy within the legal world as to whether crypto assets are currency or property. While this may sound like a trivial distinction to the layman, there are some important legal differences.

The most important difference is that with currency, a creditor’s interest will not stay attached if it is transferred out of the country. With property, however, the creditor’s interest will stay attached, even if the property is transferred out of the country, and even if there is no evidence of fraud.

That means that if the courts classify your crypto assets as property rather than currency, it may become harder to get them back into the country. Again, this is a legal grey area, but it is something important to keep in mind.

Fraudulent Transfer

As with all matters in asset protection, you run the risk of engaging in fraudulent transfer. This occurs when you deliberately move assets out of your possession in order to become insolvent.
What counts as a fraudulent transfer? That hinges on several factors, the most important of which is timing – the later a transfer, the more risk there is of it being found fraudulent.

This is a problem that everyone faces when trying to protect their assets, but crypto can actually be somewhat helpful in this regard. Because every crypto transaction you make will have a timestamp, this can provide easy proof that you moved your assets at a specific time, if you need to show proof that the timing of your transfer was not fraudulent.

The Bottom Line

If you are relying on crypto as the sole strategy to protect your assets, you are making a mistake.

However, crypto can be extremely effective as part of a larger asset protection strategy.

In this regard, crypto is no different from many other asset protection-related matters. It is not enough to do asset protection once and forget about it. Instead, the strongest asset protection plans have multiple levels, interlocking with each other and working together to provide you with the strongest possible protection, and are updated regularly.

If you have any questions about cryptocurrency as it pertains to asset protection, or about asset protection in general, then give us a call. Bohm Wildish & Matsen, LLP has been handling asset protection-related matters for decades, and we are one of the most highly regarded firms in the field. We would be happy to talk your concerns over and see what we can do for your specific case.