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Despite some misconceptions, using bitcoin or other cryptocurrencies for asset protection in connection with offshore planning may be an effective strategy.
A crucial facet to using foreign trusts to protect wealth is ensuring that the trustee and trust assets remain outside of any jurisdiction where the grantor might be sued. Some U.S. states may find the concept of self-settled trusts anathema to public policy and thus choose to ignore the trust and treat the grantor/beneficiary as the de facto owner of trust assets.
Offshore limited liability companies are similarly exposed. Consider, for instance, a Florida resident who forms a Nevis, single-member LLC to shelter assets in a Florida bank account. If that individual is sued, Nevis law limits the judgment creditor’s remedy to a lien on LLC proceeds (called a “charging order”). The charging order would not entitle the creditor to take control of the LLC in Nevis. If the creditor were to sue in Florida, however, a Florida court might ignore Nevis law (as it would apply to ownership of the LLC) and permit the creditor to foreclose on the LLC interest. As the new owner, the creditor would have direct access to the LLC bank account and any other assets owned by the LLC. Farfetched? This is essentially what happened in Wells Fargo v. Barber.
As highlighted by the Barber case, effective implementation of offshore asset protection requires that assets be transferred to a safe location outside the reach of U.S. courts. Assets must also remain outside the direct control of members and beneficiaries. Courts have mechanisms, via contempt orders, to impose sanctions, fines and jail time to compel a debtor to disclose and turn over assets unless it is truly impossible for the debtor to comply. (While there are colorful examples of jailed debtors under contempt, bona fide impossibility is a valid defense.)
Digital Asset Protection
Digital assets, like cryptocurrencies, offer a way to keep assets safely away from potentially hostile U.S. courts because they exist entirely on a decentralized digital ledger known as the blockchain.
Cryptocurrency transactions are executed on the blockchain via a two-key system. The keys include an address (public) key and a secret (private) key. Think of the address as a transparent envelope. Anyone can see inside the envelope, but only the secret key can open it to access the contents. Keys are simply a sequence of numbers and letters. The secret key remains under the owner’s control and provides the ability to transfer the asset. “Transfer” is somewhat of a misnomer, as assets don’t actually move. Rather, the blockchain ledger is updated to reflect the transfer of ownership. The right to spend digital currency is granted to the holder of the secret key corresponding to the address posted in the blockchain. Additionally, an address can be created to require a combination of multiple secret keys (multiple owners) to be spent (transferred).
A critical point is that anyone with the appropriate secret key(s) can execute the transfer of the asset. Keys are often kept on a computer or mobile device, but they can also be stored on detached storage devices (such as a USB drive), a sheet of paper in a safe (referred to as “cold storage”), or even memorized (although relying on so-called “brain wallets” may not be advisable). In the most simplistic terms, using cryptocurrency in asset protection may simply involve the transfer of a private key to an offshore trustee (or manager).
Properly selected offshore trustees are unlikely to become subject to the jurisdiction of a court where a defendant may be sued. Absent jurisdictional authority, a court is powerless to compel the trustee to turn over assets. An added benefit is that blockchains are decentralized. This means they are not subject to any central authority (such as a bank or other financial institution) that might be legally compelled to provide a court with access or control over assets in its possession. Without the complete private key, no court or legal authority can manipulate ownership of a blockchain asset.
Source: Forbes Legal Council
Cryptocurrencies As Legitimate Asset Protection Tools
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