Self-managed funds move into bitcoin

Posted | 11/12/2017 / Views | 2517
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Financial adviser Liam Shorte fields more than 20 questions a day from investors thinking about joining the Bitcoin party. Many are wondering if they can buy into the crytocurrency using a self-managed superannuation fund.

"It's fear of missing out at the moment. There are people who have told me they want a steady income in retirement and now they are looking at Bitcoin," Shorte says.

Perhaps no one should be surprised that advisers and accountants are fielding an increased number of calls from would-be investors. Bitcoin surged past $USD16,000, in trading in the US on Thursday, rising more than $USD3000 in a single day and this week Saxo Bank predicted that Bitcoin could peak at more than $USD60,000 in 2018, with a market capitalisation of over $US1 trillion.

"It feels like people have moved on from property to Bitcoin," says Shorte, adding that much of the interest is coming from savers between the ages of 20 and 40, the majority of them male. Many are attracted by the ability to trade fractions of Bitcoins.

Professional services firm Deloitte is also seeing a rise in Bitcoin inquiries from trustees.

"We are definitely seeing an increase in the number of people who want to get into it," says Taralyn Elliott, a partner in Deloitte's audit and assurance practice. 

"I anticipate that the number of self-managed super funds investing in these assets is going to rise, based on the level of inquiries we are fielding from trustees and their advisors,"  adds colleague Jo Heighway, a self-managed fund audit specialist at the firm. Of the 16,000 self-managed super funds audited annually by Deloitte, less than 50 currently hold Bitcoin. 

There is good news and bad news for investors who want to buy Bitcoins in their self-managed fund. The good news is that under Tax Office rules, they are allowed to do so. But, warns an ATO spokesperson: "The nature of Bitcoin or other cryptocurrencies may mean that compliance with the regulatory rules and restrictions that apply to all self-managed fund investments is more complex or difficult."

Heighway says the requirement for self-managed funds to be audited annually might encourage some investors to buy Bitcoins in their personal name.

For those who want to go the do-it-yourself route, Heighway says that they must check that the fund's trust deed enables such investments, while the fund's investment strategy should be updated to specifically include the asset class. Then there is the issue of ownership and valuation. All investments in a do-it-yourself scheme must be held in the fund's name and not an investor's personal name, which in the case of Bitcoin is easier said than done.

"We are seeing trustees struggling to get ownership registered in their fund's name," Heighway says.

This is because not all so-called wallet providers, which act like a bank account for Bitcoins, allow investors to register the wallet in anything but their personal name. Coinspot is one Australian site that allows self-managed funds to register an account. Gold and silver bullion - and now cryptocurrency - broker Ainslie Bullion is another. In other cases, self-managed fund administration platforms are promoting Bitcoin services. Mysmsf is a specialist provider for property in super services that has branched into cryptocurrencies, although it points trustees to Ainslie Bullion as the wallet provider.

Self-managed funds will need to prove to their auditor that they have clear legal ownership of Bitcoin or any other cryptocurrency - in a market where the assets are held anonymously. In order to verify ownership definitively, the auditor will need access to blockchain and understand how to audit blockchain-based assets. Such auditors are few and far between (Deloitte is one). There is a high likelihood that auditors who do not have this expertise will only issue a qualified report. 

Another issue is the valuation of cryptocurrencies. Increasingly, different quotes are being offered for Bitcoins, so auditors will need to satisfy themselves that valuations are correct.

Self-managed fund trustees will also need be aware of the consequences of holding highly volatile assets on the $1.6 million "transfer balance cap". This refers to the maximum amount of money that can be placed in a tax-free super pension and has various implications, such as acting as a threshold after which after-tax super contributions can no longer be made. Sharp rises in Bitcoin could mean trustees unwittingly trigger the cap.

"If there are significant gains, there could be complexities," says Heighway. "Whether self-managed funds are the right place to hold Bitcoins is a question," she adds.

The ATO spokesperson says: "The ATO strongly encourages self-managed super fund trustees to seek independent professional advice before undertaking any new investment in their fund, including investments in bitcoin and other cryptocurrencies."

Deloitte Bitcoin specialist Richard Miller warns that in time liquidity could become an issue with Bitcoin. The number of Bitcoins created is expected to be capped at 21 million, and the rate at which they are being created is decelerating. If investors are prevalent in the market, the number in constant circulation could fall. "The challenge is that the more and more people buy for investment purposes, the less liquid Bitcoin becomes," says Miller.

Written Sally Patten
AFR