‘Billion dollar ticking bomb’ for SMSFs buying bitcoin

“Instead we see terms such as ‘safe’ and ‘regulated’ being used to suggest a level of safety that is unrelated to the SMSF trustees’ legal obligation to secure legal ownership of the assets.”

Mr Yew, former chief executive of cryptocurrency exchange Binance Australia, said the lack of clear regulations around exchanges and custody left SMSF investors in a legal grey area.

“This creates a potential billion dollar ticking time bomb for SMSF trustees investing in crypto assets.”

Infant stages

The custody issue – precisely who owns a crypto asset – has become a major issue in investment circles after a string of blow-ups.

The most high-profile involved Bahamas-headquartered FTX, which saw founder Sam Bankman-Fried allegedly drain customer deposits for use in personal trading and venture capital bets. More than 30,000 Australians are embroiled in FTX’s bankruptcy proceedings.

Brisbane-based super and SMF strategist Darren Kingdon said problems arose because exchanges were not handing over the digital keys, known as “cold storage”.

“It’s still very much in the infant stages,” Mr Kingdon said. “Even on the exchanges, like whose asset is it? Is it verifiably an SMSF asset or not?

“As we’ve seen with a few of the crypto disasters, just because the asset might be in an entity’s name doesn’t necessarily mean it stays that way.

“It also doesn’t prevent wrongdoing of bad actors and bad people in the space.”

But there are exchanges that cater to SMSF investors and provide guidance for customers about setting up separate private wallets with digital keys.

Crypto remains a small piece of the ballooning $876 billion SMSF sector. Tax data shows crypto investing peaked in September 2021, with more than $1.5 billion parked in digital assets, falling to $950 million in June this year.

“Crypto and SMSFs are both innately about personal control and that’s what is appealing about them,” said Mat Merlehan from Tax on Chain, an advisory that helps investors with crypto assets.

“However, with personal control comes personal responsibility. You must adhere to the superannuation laws and regulations, which include proper custody of an SMSF’s assets.”

Mr Yew’s Monochrome has been trying to get two new crypto ETFs approved. He has met with Australian Securities and Investments Commission and the ASX about getting the regulatory green light. The first attempt to launch crypto ETFs fizzled in Australia.

It’s been part of a global attempt from asset managers to convince regulators of the benefit of ETF products which would give institutional and retail investors potentially safer exposure to crypto markets.

The US securities regulator has been so-far unwilling to approve any of the several applications for a spot Bitcoin ETF, wary the products do nor protect investors from market manipulation.