September 26, 2023 by Puai Wichman
Puai Wichman, CEO & Founder of Ora Partners – an international trustee and wealth solutions firm – explains the recent SEC crypto lawsuits and the importance of protecting crypto assets in an offshore trust
Following periods of price volatility and the collapse of several crypto companies, the US Securities and Exchange Commission has filed lawsuits against crypto exchanges Binance and Coinbase, as well as fraud charges against one of the largest crypto exchanges, the failed FTX. The SEC has also taken action against a number of crypto lending platforms and decentralized finance (DeFi) projects. In these lawsuits, the SEC often alleges that the defendant exchanges violated securities laws by trading unregistered securities or they have committed straight-up fraud.
While it is still debatable whether crypto is or is not a “security,” a couple of judges have already found it to be, and SEC Chair Gary Gensler has made clear he believes the majority of cryptocurrencies are securities, based on the “Howey Test” set out in the 1946 Supreme Court decision in SEC v. W.J. Howey Co, 328 U.S. 293 (1946). The SEC’s crackdown on crypto is likely to continue in the coming months and years as the agency has stated that it is committed to regulating the crypto industry and protecting investors. While this might be a noble motive, it will likely have a significant impact on the crypto market, as it will inevitably make it more difficult for investors to trade crypto assets.
SEC Lawsuits + Threats Impacting Crypto Assets
Beyond the inevitable “headaches” (or prudent regulation, depending on your perspective) from the SEC, crypto assets are vulnerable to the now common and “routine” threats posed by hackers and fraudsters. According to the FBI, more than $10 billion in losses from online scams were reported to the Bureau in the year 2022. That was the highest annual loss in five years. The FBI further reported that there was more than a $3 billion jump in reports of online fraud from 2021 to 2022 with a near-tripling in reports of cryptocurrency investment fraud.
If regulation and hackers aren’t enough to keep you up at night, there are additional serious threats unique to crypto assets. For instance, what other investments, other than small amounts of cash, can be lost when a “cold wallet” is physically damaged or misplaced? What other kinds of assets can be permanently lost when passwords or seed phrases are forgotten or when the only person who knows these passwords and seed phrases dies? According to estimates from Glassnode data, about 10% of the current Bitcoin supply or 1,857,721 Bitcoins might never be found. Other reports estimate it might be as high as 25%. That is billions worth of value which will remain inaccessible forever essentially reducing the circulating supply of cryptocurrency.
So, what do these potential threats and lawsuits mean to you and your crypto assets?
How to Protect Your Digital Assets
Whether you need to protect your digital assets now depends on your individual circumstances. If you are a smaller investor or if you only hold a small amount of crypto assets, you may not need to take any immediate action. On the other hand, if you are a large investor or you hold a significant amount of crypto assets, you may want to consider taking steps to protect your assets, and these steps may not involve either a crypto exchange or a cold wallet.
Let’s start with the first steps you can take to protect your digital assets:
- Protect your accounts from unauthorized access by using strong passwords and two-factor authentication.
- Be careful about what information you share online. Do not give out your private keys or seed phrases to anyone.
Beyond the obvious, perhaps consider arranging to have your assets held in an offshore trust managed by a professional third-party fiduciary – and at the very least consider using encrypted cloud storage. With these methods, you can virtually eliminate the risk of physical loss or media failure while maintaining convenient access to your crypto assets using your computer, phone, or tablet – anywhere with an internet connection. Trustees have secure access to your assets and are skilled in properly managing and protecting all assets. Cloud storage providers typically have multiple data centers located in different geographical regions. This means that your files are less likely to be lost or damaged in the event of a natural disaster or other event that affects a single data center. Using these methods, you can be assured that you are utilizing the best available security controls, including encryption, access control, and audit trails. With a professional fiduciary, you can feel secure that passwords and seed phrases won’t ever be lost, even if you die or become disabled. It is of course important to choose a reputable fiduciary or cloud storage provider that has a good track record of security.
Take Action Now
No matter how much you invest or how seriously you take any of these threats discussed, here is one last bit of practical advice: Be aware of the risks involved in investing in crypto. Cryptocurrencies are a volatile asset class and there is always the risk of losing money. Take proactive steps now to protect your digital assets in an offshore trust to keep your investments safe from future threats or even potential lawsuits.
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