Possible ways for an SMSF to secure bitcoins

30/11/2017

Following on from last month's article on whether a self managed super fund can invest in bitcoins, we will now look at possible ways in which an SMSF can securely hold bitcoins for the purpose of satisfying the 'sole purpose test'.

As discussed in last month’s article, an SMSF wanting to invest in bitcoins may be able to satisfy the sole purpose requirement, if it could be shown that the SMSF is not directly or indirectly providing financial assistance or benefits to its members prior to their retirement, including use of or access to the assets of the SMSF.

An SMSF may be able to satisfy this requirement, if it could be shown that the SMSF’s bitcoins are held securely, and that the trustee of the SMSF, and not the members, are controlling any movement of the bitcoins. Any movement or transfer between the trustee and the members, even temporarily, could cause significant issues under the sole purpose test.

It was mentioned in last month’s article that one way in which bitcoins could be stored is ‘online’ in a public IP address. Expanding on this point, access to bitcoin requires a public and private key pair. While the public key can be given to anyone in order for anyone to pay into your digital ‘wallet’ using this public key, the private key on the other hand is required to be paired with the public key in order to send bitcoin from your ‘wallet’. Therefore, all transactions can be viewed publicly on a digital ledger, otherwise known as the blockchain.  

While bitcoins may be stored ‘online’ for the purpose of exchange, it is important to note that the private key is also located on the exchange and hence may be more susceptible to hacking and potential loss of your cryptocurrency.

Other ways to secure or store bitcoin and other cryptocurrency is in ‘cold storage’, generally on a hardware wallet as opposed to a ‘digital wallet’. Storing bitcoins on offline ‘cold storage’ devices require a pin code to access the interface. These wallets store the private key securely inside the device and thus are less susceptible to being hacked. Further, these ‘cold storage’ wallets will generate a ‘seed’, which is a passphrase consisting of a certain amount of words that can then be used to restore the wallet to another wallet if the original one is lost or damaged. The device itself and this ‘seed’ phrase should be stored in a secure location. An even more secure way to store bitcoins is on an ‘air gapped’ computer that has never been online before, also stored in a secure location.

For advice on whether your current deed provides the relevant power to enable an SMSF to invest in collectables or personal-use assets, or to discuss what and how to best manage your digital assets, please contact Townsends Business & Corporate Lawyers on (02) 8296 6222.