● Advanced RMIT

Crypto Assets and your Self-Managed Superannuation Fund (SMSF)

10 minutes 4 months ago

Cryptocurrency is transforming personal finance. Digital crypto assets give consumers unprecedented direct control over what they invest in, and how they make those investments using digital infrastructure. This increased control and autonomy resonate strongly with another realm of personal finance that has a much longer history – Self-Managed Superannuation Funds (SMSFs).

A SMSF is self-custody for your retirement fund. Unlike retail or industry superannuation funds, SMSF members have direct control over how superannuation contributions are managed and invested. That means you can choose what you invest in.

Today, SMSFs count more than 1.12 million Australians as members with a collective $868.7 billion share in the nation’s $3.3 trillion in superannuation assets, according to the latest data from the Australian Tax Office (ATO).

Not all SMSFs are the same, and they can be structured in many ways to meet your individual needs. For instance, a SMSF can have up to 6 members who are usually related (e.g. spouses and 4 adult children could all be members of a single fund). The members of the fund must also be trustees (or company directors if the fund has a corporate trustee). The trustees are ultimately responsible for managing the fund. Although, this does not mean that SMSF trustees need to manage everything themselves – auditors, financial advisors, lawyers and tax accountants are all important professional advisors.

In this article we will explore how SMSFs and crypto interact. How can SMSFs benefit from the inclusion of crypto assets? What does such inclusion mean for the larger crypto ecosystem? And what are the key issues SMSF trustees need to keep in mind when investing in crypto assets?

Crypto Assets and Superannuation Funds

Why might people decide to invest in crypto assets as part of a superannuation portfolio? Despite significant short-term price fluctuations, crypto assets have enjoyed significant returns through increasing prices and market depth over the long term. From a micro perspective, crypto assets may hedge against other asset classes – that is, a strategy to offset losses. Although the economic evidence on this point is mixed, some studies have shown Bitcoin to be an effective hedge against some stocks, indices, foreign currencies and commodities. Other studies have noted Bitcoin may have a role in portfolio diversification more generally.

More broadly, digital assets are the native vehicle for direct investment in emerging Web3 projects. Traditional financial and investment tools do not provide full exposure to this frontier part of the digital and cryptoeconomy.The crypto ecosystem itself also benefits from the increasing interest from institutional investors. Beyond Australia, large institutional investors – including large pension and retirement funds – are paying more attention to crypto assets. Institutional interest in crypto assets is a sign of legitimacy and maturity for the Web3 industry. It suggests that institutional entities have confidence in this emerging asset class, and the business models and sustainability of many decentralised projects.

Institutional interest in crypto assets also has some broader implications for Web3. An increase in capital investment might fund further innovation in crypto markets. More mainstream attention, and integration into the traditional economy, also builds pressure for clear regulatory and taxation policy. Furthermore, given that the purpose of retirement funds is often to make longer-term investments, rather than speculative ones, these investors can add depth to crypto asset markets, dampening volatility.

It’s clear that there are some benefits of the increasing integration of crypto assets into SMSF. But it’s important to consider some key issues if you’re considering this.

Key Issues for SMSF members

SMSF trustees that are considering investing in crypto assets as part of the fund should consider independent legal, financial, and taxation advice. In doing so, there are five key areas to discuss with your advisors:

Trust Deed. A SMSF is a type of trust. This means that they are established through a trust deed, a formal document that sets out the rules of the fund’s operations. Does the trust deed make any explicit reference to crypto assets? Are crypto assets allowed under the trust deed? Are there any restrictions or limitations on the types of crypto assets that the fund can invest in?

Investment Strategy. SMSFs are required to have an investment strategy, give effect to the strategy, and regularly review the strategy. Of course, the fund’s investments – risk exposure, diversity, and liquidity, should reflect the investment strategy. In this regard, not all crypto assets are the same. There are various ways to gain exposure to the crypto asset market (e.g., directly holding crypto assets, purchasing units in an exchange-traded fund, or buying shares in a company that has exposure to crypto assets). Are crypto assets expressly mentioned in the SMSF’s documented investment strategy? How does a proposed crypto asset investment align with the SMSF’s investment strategy?

Due diligence. In recent years, there has been an increase in investment scams explicitly targeting SMSFs. This is where a fraudulent operation – typically operating outside of Australia – creates a website that resembles a legitimate investment trading platform or a fraudulent copy of a real financial services firm. When cryptocurrency is paid to an unknown third party, it can be exceptionally difficult and expensive to recover. And if the offer is too good to be true, it usually is. What checks can be performed to identify the individual or business's details? Where are the businesses and relevant personnel located and how can this be verified? What is understood about the investment, its risks, and potential returns?

Separate assets. SMSF investments must be held separately from the personal or business investments of the SMSF’s members. For crypto assets, this means that there should be no intermingling of funds or transactions between personal and SMSF addresses. In practical terms, the SMSF will require its own bank account, its own digital currency exchange account, its own cryptocurrency wallets, and so forth. Who will establish these accounts on behalf of the SMSF? What are the product offerings (e.g., savings account) that best suit the SMSF as opposed to the everyday personal or business needs of SMSF members? What are the protocols that should be implemented to maintain the separate assets?

Storage. If the SMSF invests directly in crypto assets (e.g., cryptocurrency), then consideration must be given to how these assets will be stored and kept secure – just as the SMSF would do for physical investments like gold or artwork, or intangible assets such as shares or currency. Should crypto assets be held with an exchange? Should crypto assets be held by the SMSF or with another storage provider? If a software wallet or hardware wallet is used, what are the cyber security and physical security protocols in place to protect devices?

Record keeping. SMSFs must maintain complete and accurate records of the fund’s assets and investment activities. This may include documenting the reasons as to why the SMSF’s trustees have decided to invest in crypto assets, and where these investments are held. What records will be required for the SMSF’s auditor’s annual audit? What other records will be required for the SMSF’s annual return? Where will the records be kept and by whom?

As crypto assets and the Web3 ecosystem mature, we’re likely to see further integration of these investments into SMSFs in Australia and abroad. In this article we’ve explored some of the reasons why you might consider digital assets as part of a SMSF portfolio, and some of the key issues to think about and discuss with your advisor.

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Dr Aaron Lane and Dr Darcy Allen are with the RMIT Blockchain Innovation Hub, RMIT University.

Disclaimer: This article is educational in nature and designed for general information purposes only. You should consider seeking independent legal, financial, taxation or other advice to check how the information relates to your unique circumstances. Coinspot, RMIT University and the authors are not liable for any loss caused, whether due to negligence or otherwise, arising from the use of, or reliance on, the information provided directly or indirectly, by use of this article.

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