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Bitcoin: Legal Risks For Asia-Based Investors And Advisors 

Calvin Koo, 1 March 2021

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A senior lawyer in Asia asks what sort of considerations investors should have in mind when buying bitcoin, including legal issues, as the digital field continues to grab headlines.

Bitcoin recently pushed above $58,000 per coin and the area of digital assets continues to draw in heavy inflows. Some commentators say the area is becoming more mainstream, raising questions about what regular banks and major financial regulators are going to do. 

In this article, Calvin Koo of international law firm Kobre & Kim talks about the investment case and risks from the viewpoint of Asia-based clients and advisors. The editors are pleased to share these views. Please jump into the conversation. The usual editorial disclaimers apply. Email tom.burroughes@wealthbriefing.com and jackie.bennion@clearviewpublishing.com 

Tesla’s 8 February announcement that it had bought $1.5 billion in bitcoin is the latest in a recent series of mainstream endorsements driving bitcoin’s price to new all-time highs, after a 300 per cent price surge in 2020. Just over a week later, bitcoin traded at $50,000 for the first time, with the total market value rising to $940 billion. 

For investors previously unsure about bitcoin, these developments may shift their views from bitcoin being a scam or a curiosity at best to now being a serious asset worth considering for their portfolios. 

An ultra-high net worth individual tracking this trend, whether to hedge, diversify, or ride a wave of high returns, will rely on family offices and other trusted advisors to make appropriate financial decisions. But these investors and their advisors should also seek knowledgeable counsel on legal exposure risks associated with bitcoin, particularly since, for many, this is a novel investment with new laws and regulations continuously sprouting across the globe.

For example, in Asia-Pacific, governments in key UHNW jurisdictions are regulating cryptocurrency trading platforms in line with global anti-money laundering standards. Following Singapore’s new regulation early last year, Korea announced its new law which is taking effect this March. Hong Kong and Dubai’s International Financial Centre also proposed new regulatory regimes for 2021.    

Although these laws may enhance UHNW individuals’ commercial confidence in dealing with new service providers and counterparties, there is potential downside legal risk. For example, the know-your-client features of these laws ease the ability of UHNW individuals’ adversaries to trace, and potentially freeze, an individual’s bitcoin holdings. In addition, UHNW individuals and their advisors should consider whether asset protection strategies designed to mitigate those risks inadvertently run afoul of any applicable AML, sanctions or tax laws.  

Below are three key risk areas UHNWIs must keep in mind:

1. Traceability 
Many UHNW individuals rightly value their privacy and prefer opaque asset holdings due to security reasons. Those who are new to cryptocurrencies may harbour the common misconception that bitcoin offers safe anonymity. But bitcoin is not completely anonymous and, in many circumstances, is readily traceable. This is because bitcoin uses blockchain technology. A fundamental feature of that technology is that information recorded on the blockchain is immutable. This means that literally every transaction of bitcoin is recorded on publicly accessible non-centralised ledgers. Consequently, motivated governments and adverse individuals may be able to track and trace an individual’s bitcoin holdings and transactions through forensic analysis of public blockchain data.  

Although use of pseudonyms to transact bitcoin offers some level of privacy protection, sophisticated investigators can often ascertain the true owner. For example, in jurisdictions where KYC regulations require crypto-exchanges to hold customer identification information, adversaries can potentially access that information through traditional investigatory and legal disclosure tools. Hong Kong, Korea and Singapore already impose KYC requirements on certain crypto-exchanges in different circumstances, with Hong Kong recently proposing an expansion of those requirements. The DIFC and other sophisticated jurisdictions committed to AML standards are likely to follow this cross-border trend. Thus, UHNW individuals interested in bitcoin should understand how KYC regulations designed to combat unlawful activity may also collaterally impact their legitimate privacy concerns.

2. Seizability
Armed with information about a UHNW individual’s bitcoin holdings, opportunistic adversaries may target that UHNWI with aggressive legal claims, allowing them to pursue injunctive court orders to freeze bitcoin among other types of assets. Their goal may be to ultimately seize the bitcoin or force other concessions from the UHNW individual. Although the question of whether bitcoin is property subject to traditional proprietary court orders is still developing in many jurisdictions, the global judicial trend is clear, including in Asia-Pacific. Courts in Singapore and South Korea have already recognised bitcoin as property. Moreover, Hong Kong and English case law (1) from the last 16 months go further by effectively recognising that bitcoin is a sizeable asset notwithstanding its intangible existence.  

Consequently, UHNW individuals should not simply assume that bitcoin is secure against seizure. Instead, UHNWIs and their advisors must proactively consider appropriate asset protection structures for holding bitcoin in a lawful manner that maximizes security consistent with the investor’s overall goals. Given the novelty of such investments, a “stress test” should be run against proposed structures. In this way, experienced investigations and asset recovery lawyers can probe these structures as a government or civil adversary might, thereby strengthening risk mitigation strategies.

3. Government enforcement exposure
Advisors tailoring these structures and strategies must also consider how various laws in relevant jurisdictions, including laws that may not explicitly refer to cryptocurrencies, may nevertheless apply to acquiring, divesting or otherwise transacting in bitcoin. Failure to account for these laws may inadvertently expose the UHNW individual to adverse actions from governmental authorities. For example, AML and sanctions laws that various governments use to prohibit certain types of transactions, or which create disclosure obligations, are likely to still apply to transactions involving bitcoin. Therefore, a careless approach to transacting in bitcoin without understanding these laws may result in an UHNWI being made an example of by a government authority set on aggressively establishing an important new legal precedent.  

UHNWIs should also understand if and how their bitcoin holdings and transactions need to be reported to local tax authorities, including what taxes must be paid on any gains and when. The answer may not always be obvious, since many tax authorities are still creating and clarifying such rules. Nevertheless, as failure to disclose, or pay appropriate taxes, can open the door to civil or criminal liability, UHNW individuals need to ensure that their usual tax advisors are up to date on this developing area of tax law.

For many UHNW individuals, investing in bitcoin is an exciting new option. Naturally, they will look to their trusted advisors for prudent financial advice. But for those new to cryptocurrencies, it is important to also consider legal exposure risks that come with bitcoin investments and transactions. This is especially important given the rapidly changing legal and regulatory environment surrounding cryptocurrencies. Experienced and innovative private client lawyers working alongside a UHNW individual’s longstanding trusted advisors can help close this advice gap.

About the Author
Calvin Koo represents ultra-high net worth individuals pursuing offensive and defensive strategies related to cross-border government investigations and regulatory enforcement actions. He also counsels financial technology clients regarding cryptocurrency-related disputes and investigations, as well as victims of fraud on international asset tracing and judgment enforcement strategies. Koo has a global practice, with an emphasis on matters having an Asia-Pacific and US nexus.

Footnotes:

1, In certain cases, English case law remains influential in many common law jurisdictions across Asia-Pacific, including Australia, Hong Kong, New Zealand and Singapore, for example. 

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