Some financial advisors, and their clients, are eager to invest in bitcoin and other cryptocurrencies. They haven’t though because there hasn’t been an easy, effective, regulator-approved way for advisors to invest in the new asset class like there is for stocks, bonds, and other alternatives.
But that changed Oct. 23, when the Wyoming Division of Banking sent a “no-action” relief letter to Two Ocean Trust, allowing it to provide custodial services for traditional and digital assets to high-net-worth individuals, family offices, and RIAs. The regulator also declared Two Ocean Trust a “qualified custodian” in the letter, a designation generally required by law in order for investment advisors to do business with one.
With new regulatory support, a key barrier is now gone that prevented advisors from investing in cryptocurrencies on behalf of clients. Thousands of wealth managers use more than one custodian and if they are willing to add another, they could advise clients on the new asset class and charge a fee based on the value of those assets under their management.
Chris Land, general counsel to The Wyoming Division of Banking, told RIA Intel that, to his knowledge, the division is the first state or federal banking regulator to write such a letter and give a qualified custodian status that includes cryptocurrencies.
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The letter explicitly states that not all chartered, non-depository trust companies meet the definition of bank under the Advisers Act, and not all trust companies are qualified custodians. Nonetheless, the letter is a landmark decision according to the trust company, the regulator, and other observers.
“I do think it sets an important precedent,” Land said about the letter which he personally worked on for months, consulting top lawyers with expertise on cryptocurrencies in Washington D.C. and New York City. “This is intended to be the first of a series of no-action letters.”
Years of global crackdown on offshore assets and trusts have led those things to return to the U.S. or stay there. Some states have benefitted more than others due to their favorable tax rates and laws, including Wyoming, and right now financial services are especially interested in doing business there, according to Land. There are currently five trust company applications under consideration by Wyoming’s regulators, the highest total ever that Land could recall.
Interest in Wyoming from family offices and others is also rising, many with cryptocurrencies or inquiries about them.
The state regulator’s letter to Two Ocean Trust is one step in helping all those parties better navigate the new asset class. “It makes it easier for institutional investors to get comfortable with the asset class if they have a legal opinion they can lean on,” Land said.
That clarification could mean a wave of new clients for Two Ocean Trust and others in the future, prove to be a turning point of investor adoption, and cause cryptocurrencies prices to rise, Joel Revill, co-founder and CEO of Two Ocean Trust, told RIA Intel.
“I sort of had a hard time getting my head around digital assets because it’s not an asset class you can build a model around like I was accustomed to,” said Revill, who worked at market maker Citadel and managed portfolios at other companies for over 15 years before founding Two Ocean Trust.
After more research, the chief executive said he took a personal interest in cryptocurrencies and realized the potential in the new asset class. Along with the expected enthusiasm for bitcoin and others, there would need to be reliable service providers, and so Two Ocean Trust was founded.
Last year, the company began with trust and estate, custody, trade execution, separately managed accounts, reporting, and other wealth management services for traditional assets. Now, it’s adding cryptocurrencies and supporting the asset class the same way Charles Schwab and others do stocks, bonds and other assets.
Two Ocean works with clients that have at least $5 million in investable assets and who make an initial investment allocation across any asset classes of at least $250,000.
Serving as a trustee and custodian to cryptocurrencies — that can be stolen or misplaced forever like physical fiat currency should their cryptographic key be obtained or lost — requires security that Revill likened to something from a James Bond movie. Two Ocean Trust uses multi-signature protocol to gain access to keys, meaning more than one person must submit their thumb, facial, and voice to be recognized and authenticated, in addition to other security measures.
The trust company also uses deep-cold-storage-only, meaning keys are stored on a device never connected to the internet.
Advisors and cryptocurrency owners will also be happy that Two Ocean Trust will also distribute a Form 1099 document to its customers — something not all cryptocurrency brokerages and funds do, according to Revill. In the past, the Internal Revenue Service only asked tax filers to declare whether they owned any cryptocurrencies. Now, it requests whether filers sold or acquired a financial interest in any and taxes them accordingly. (The IRS says “virtual currencies” are taxable by law like any other property.)
The emergence of companies like Two Ocean Trust and others could increase demand for cryptocurrencies while the supply of some weakens, driving up prices, according to Revill. A limited number of bitcoins can be mined and the creation of new ones is already slowing, he said.
“It’s obviously self-serving, but I really think for your [readers] this is going to be a fascinating topic over the next six to 12 months.”
Michael Thrasher (@Mike_Thrasher) is a reporter at RIA Intel based in New York City.