In my humble opinion, the invention of the Blockchain was like inventing the internet. People are legitimately spending money purchasing Cryptocurrency, and the distrust in centralized banks and government has fueled the creation, and the rise of Bitcoin, and a new digital currency age.
I am an Asset Protection Attorney for investors, and most of my clients either already own cryptocurrency in their portfolio or are adding it into their portfolio now. You cannot walk into a gym or a coffee house without overhearing some sort of conversation about Bitcoin and Cryptocurrency.
We have several important questions that need to be discussed about Crypto. Such as: What is Cryptocurrency? What is backing Crypto and Bitcoin? How does the U.S. Government and IRS legally define Cryptocurrency and its ramification? How do you create an asset protection plan to protect your cryptocurrency?
What is Cryptocurrency?
Digital currencies, aka “cryptocurrency”, that operates on a decentralized blockchain. Now that is a mouth full. Let’s try making more sense of this. First, Cryptocurrency, is NOT a currency. I know, this sounds crazy, but it is not a currency, yet. It could be down the line, but it is not one now.
Cryptocurrency is not like any other traditional financial asset. It is not a stock. It is not a payment system. It is not money. Yet, it has features of all of them, but it is not them, and those features are not an identity to them.
What Bitcoin and Cryptocurrency is, depends on its use and how it stores, and imports value based on secure “title of ownership.” Cryptocurrency is defined legally as a property in almost every country in the world, including the United States. And this has huge implications on tax regulations and legal disclosures.
Cryptocurrency is a “payment system” and “money” and “security”, but (pier-2-pier), with no dangerous third-party centralized bank. It is a decentralized ledger or blockchain that solves problems by math, with a transparent ledger and trail that is distributed on multiple computers and validating transactions in the open. What was created was a transparent, and completely auditable trail of everything that has happened in the blockchain, and no one person can just come in and say “hey, I am going to change the block.” And it is driven by consumer desire. That is the driving force of crypto the currency. Crypto is providing something that our current FIAT money does not. Security and decentralization! With a strictly limited amount of Bitcoin that they cannot just print more of and deflate its value like the U.S. dollar or other FIAT currencies.
What we have in the making is a potentially far superior system with blockchain technology, that is transferred between two people with no third-party. So, it is an entire monetary system that is now decentralized and does not depend on “trust” or “centralized banks” or any the “government”.
What is Backing Cryptocurrency?
I came across an article listening to a podcast hosted by Guy Swan. The podcast discussed an article by Jeffrey Tucker from December 2020 of the American Institute for Economic Research. This article really dives into the question of if Bitcoin even has a value? And what is backing it?
From a hard-money background, it is hard to make sense of what Bitcoin and Cryptocurrency is. We are taught about paper money and gold. What we need to do is unplug from the matrix and update our expectations and thinking about money.
Mr. Tucker’s article goes back to 1912 and talks about Ludwig Mises’ origins of money, valuation and how money gets its price in terms of the goods & services that you get in exchange for it. Bitcoin satisfied both of these conditions.
The valuation of money comes from the markets. It comes about slowly and gradually as business owners look for a commodity for exchange. Instead of bartering with each other, people get a good, not to consume, but to trade, and that good becomes money. And money is the most marketable commodity.
Bitcoin’s value is that it is both a “payment system” and “money”. The payment system is the source of value. The actual Bitcoin unit itself only expresses that value in terms of its price. Think of it as an accounting of your trust and your faith in that network. Just like a stock price for a company.
It is the combination of being both an asset and a payment system that makes Bitcoin unique but causes confusion, because we are conditioned to think of currency as being separate from a payment system.
To understand the history of what is backing cryptocurrency, we need to go back in time to the 1970’s when the U.S. eliminated the Gold Standard backing the U.S. dollar. The U.S. did this because we did not have enough Gold to cover the actual number of dollars that were needed to be printed to cover the rapidly rising productivity of the nation. By going off the Gold Standard, this allowed the U.S. Government to go into a massive expansion and compensate for the rising productivity. Simply, the U.S. was able to print more dollars.
If you look at this issue today, we may be repeating the 1970’s, with another massive jump in technology productivity improvements again, with simultaneous price inflation that lowers the real value of the U.S. dollar.
The problem with the dollar is that you can print it endlessly into existence and banks can loan money it into existence. And you can lend it into existence at ten times the rate verse how fast it is printed into existence. Most of the money in the economy is created by banks making loans to businesses and individuals, which can fuel inflation.
Value comes from two people agreeing that something has value and trust. People are losing trust in a third-party intermediary, and are losing trust in centralized finance, and simply are losing trust in governments.
What Bitcoin is backed by is a public blockchain ledger that contains proofs of all the transactions on an open and auditable network, and Bitcoin has a limited supply.
Until now, money transfers relied on third party service providers (banks and credit card institutions). But the problem is that these third-party payment systems are not available to just everyone and are losing trust. In fact, most of humanity does not have access to them, or the currency in many countries is worthless. Consider them financially disenfranchised.
Bitcoin solved that problem and created a peer-to-peer currency based of a proof of work concept. The value aspect kicked off in 2017 when people were able to easily buy Bitcoin and Cryptocurrency on exchanges and the technology became more readily available.
How does the U.S. Government and IRS define Cryptocurrency?
The IRS has defined cryptocurrency as a taxable asset and classified it as a property.
This is very important.
Again, the IRS classifies Cryptocurrency as a property.
This means that your cryptocurrency can be targeted in legal action, you will be legally required to disclose that you own it, how much of the cryptocurrency you own, and potentially can result in the loss of your cryptocurrency assets.
The Forbes Legal Council wrote a great article titled “The Myth of Using Cryptocurrency for Asset Protection.” A common misunderstanding is that people purchase cryptocurrency because of its “privacy” factor and think that because the transactions in the blockchain are anonymous and cannot be traced to a single individual that they are inherently protected. That by simply owning cryptocurrency they have effectively and efficiently “hidden” wealth.
This is a legitimate misunderstanding, and the nature of Cryptocurrency makes it seem like there is no need to take further steps to protect it. However, as fellow Asset Protection Attorney Doug Lodmell points out, “this misses a very important point, and one that if you are not careful can land you in serious legal trouble, and even jail: The only way for you to protect crypto with just a wallet is to be willing to lie under oath!”
If you are ever in a lawsuit and are subjected to a money judgment and brought into debtor’s court, because the IRS classifies cryptocurrency as a property, you are legally required to disclose it as a property asset. You are legally required to disclose details about your assets, including investments, bank accounts, real estate ownership, personal assets, and yes, even your digital cryptocurrency. And just like any other property, it can be frozen and seized. If you think you can simply not disclose these assets, that is fraud on the court, and you would face very strong legal penalties and consequences, and potentially be held in contempt of court. People do go to jail for this.
Even if you mined all your crypto years ago and there is not a single person who knows you have it, you still have one significant hurdle to protect it. That is called “Perjury”. If you were to end up with a judgment against you, and in a debtors exam, you would almost certainly get a question like this:
“Do you have any digital currency, cryptocurrency, NFTs or any other digital asset in any form or in any location, wallet, staking service, or other storage or investment location anywhere in the world?”
If you do, then the answer will be Yes! At that point, they will know the exact amount, the location and who holds the keys and passwords. If you are the keyholder, then at that point they are free to ask the judge to order you to transfer the currency to them to satisfy the judgment.
You may be tempted to just omit that you have anything, or to having less than you actually do. But the problem with that is that you are now gambling with your liberty and freedom and jail time because any lie is Perjury and it is a criminal offense punishable by jail.
Also consider the fact that when you purchase cryptocurrency, there is a record. Exchanges like Coinbase and Gemini keep records and will be reporting them to the government.
While these beginning stages of Crypto seem like the wild west, an often-overlooked element of an effective asset protection plan is transparency and accountability. Especially when buying and selling Cryptocurrency. Not hiding assets or committing fraud on the court. The best practice and strategy that you can do is to protect your cryptocurrency though a very strong and flexible Asset Protection Bridge Trust that has some Offshore capability.
The IRS has Classified Cryptocurrency as a Property, How can we protect Cryptocurrency from Lawsuits?
It is actually very simple to protect your cryptocurrency from lawsuits and creditors. Why lie or omit and commit perjury when you have a much better, much safer and easier option? We would assign your exchanges, tokens, and wallets into an Asset Protection Plan. Now you have no reason to lie, commit perjury or hide your crypto assets. You can now tell and disclose the entire truth and still be comfortable that no judge can reach your cryptocurrency. The reason it is very important to transfer the wallet, exchanges, and tokens out of your personal name and into the asset protection plan is because you want to establish that the cryptocurrency is owned by the plan, not you. The key point that you must remember is that the purchases and exchanges of cryptocurrencies are auditable and transparently traceable,. The exchanges that you purchase your cryptocurrencies on can be subpoenaed, and in any lawsuit, you would be legally required to disclose your cryptocurrency assets.
The Asset Protection Bridge Trust needs to be created and your assets transferred into the plan proactively before you are sued. If at some future time we do need to protect the cryptocurrency assets and transfer control of the trust fully to the offshore trustee, we would be able to establish a new wallet. However, we need to transfer the wallets and exchanges out of your personal name now, before any lawsuit. The result of creating an asset protection trust and transferring your cryptocurrency assets into the trust is that anyone who wants to attack the Trust structure will be required to travel to the Cook Islands and fight in a jurisdiction where the home court is to your advantage.
The bottom line is that protecting cryptocurrency is just like protecting any other asset, and it needs to be done right.
To learn more about asset protection trust and the power of Offshore Trusts, click this link https://btblegal.com/2020/08/asset-protection-trusts-domestic-vs-foreign/
By: Brian T. Bradley, Esq.
HNW Asset Protection Attorney
Senor Managing Partner Bradley Legal Corp
Lead Co-Counsel Attorney of the Asset Protection Counsel
Enjoy the video on Asset Protection in the 21st Century https://vimeo.com/646997050/9f5a490f35