Speaking to SMSF Adviser, BDO partner Shirley Schaefer said there has recently been more investment in non-traditional type investments by SMSFs including cryptocurrency.
In most cases, Ms Schaefer said SMSFs are only investing smaller amounts in their funds, although there are some funds with more substantial amounts.
Where SMSFs invest in this asset class, it’s vital trustees understand what the requirements are for owning these types of assets in an SMSF, she said.
“I do worry that some people dabble in things inside super because they can without recognising that there can be extra risks if they don’t keep an eye on things and do them properly,” she cautioned.
Some SMSF trustees, for example, don’t understand the importance of the wallet being in the name of the super fund, which is important for ensuring that the assets of the super fund are kept separate, she explained.
Ms Schaefer said she has come across instances where SMSF trustees have had their wallet stored on a USB flash drive.
“It wasn’t on an online account, which meant that there was no ownership or way of verifying who it belonged to. It was whoever had custody of the [USB flash drive] and the password,” she said.
Some funds have also encountered some challenges from a record keeping perspective, she said.
Depending on what platform the SMSF trustees are using to invest in cryptocurrency, Ms Schaefer said in some cases it can be difficult to obtain data on the investments if this information wasn’t collected on 30 June or soon after.
“It’s all online and it’s all instantaneous, so if clients don’t get their reports down on the 30th of June or shortly thereafter, the data can potentially be lost,” she said.
“It depends a lot on what platform you’re on and how you’re using it. Every service provider does it differently.”
Ms Schaefer said it is also important that trustees recognise that cryptocurrency is still a completely unregulated market.
“Whilst I’m not a big fan of over-regulation, trustees do need to acknowledge that there’s increased risks and I’m not sure if some trustees understand that, to be honest,” she said.
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Crypto (I refuse to add “currency” as it is not recognised as legitimate currency by any country) is no different to the many investment schemes and private property trusts.
Property trusts find it too painful to supply to SMSFs a market value at 30 June each year, and a set of financial statements for inspection, and your lucky if they do, so report within the SMSFs lodgement window.
The answer is quite simple. If crypto exchanges don’t want to be audited and property/investment trusts don’t want to revalue your investments or give up your financial statements, then DONT allow SMSF investors. That’s so easy. Stick that in your prospectus!
SMSFs have annual regulatory requirements so cypto exchanges and property trusts need to stop conveniently ignoring them just to take their money.
If you don’t want to play the SMSF game then stay out of it!
For advisers and accountants, we all do a good job advising SMSF trustees on compliance issues when they ask about such investments, but think about adding these practical matters to your advice. You might as well as you will get the blame anyway if the SMSF is late or stuck in audit.
Firstly, it’s accepted as legal tender in El Salvador. Secondly, I would suggest you research what a currency is. It’s effectively a medium of exchange, something that the crypto industry takes to whole other level, especially across various geographic borders.
I agree crypto exchanges can do better (my thoughts in the various comments and replies below) but you can also properly and safely self-custody crypto assets on digital wallets. On chain, you have control over the assets as long as you retain the private keys, anyone can review and verify the balance history of any given public wallet and there are legal documents you can prepare the necessary documents to effectively assert the fund’s ownership of those wallets for the benefit of its members.
This space is an incredible opportunity and has a bright future long-term, so why not have a portion of your superannuation invested in it? Yes, trustees need to be careful and informed when making the leap into this asset class just like any other asset class. However, there are ways to safely, securely and compliantly invest in crypto and nothing should stop trustees from doing so if they think it’s in the best interests of their members.
It is interesting how those who hold Crypto in their funds just expect the Auditor to just wave it through without comment but would be the first to sue the Auditor if things went belly up. A SMSF is there to provide for your retirement. It is not there so you can gamble
See my comments below RE: Responsible investments of SMSF funds in crypto. There is a way to do it responsibly (I do this in my SMSF) but we need all participants to be educated on this asset class (both SMSF trustees and accountants/auditors/financial advisers) in order for it to be successful.
We don’t expect a free pass from auditors, but we do expect them to understand this asset class to such a level that, instead of saying “just get rid of it” and blanket qualifying every part of their reports, they can offer solutions and work with SMSF trustees to get the fund compliantly holding crypto assets.
…and we expect you to understand what an audit is about. Australia is the only country to allow a person to be the trustee of their own super. That comes with conditions, one of which is an audit to ensure 2 things. The investments exist and are correctly valued, and you comply with the rules & regulations. Assume this is an ATO audit every year, it’s just been privatised.
Listed shares & real estate can be confirmed, independent of your stock broker and real estate by title. What about crypto? It’s not recognised in any country in the world as currency. Most invest via Crypto exchanges who hold “wallets” of the stuff, or say they do. Is the auditor supposed to take your word or the crypto exchanges? That’s not an insult, that’s what an audit is required to do. Look at any crypto exchange and tell me who the directors are, I can’t find any.
The auditor can lose his registration or be sued if they don’t confirm investments correctly. It doesn’t matter if you say I accept the risk, that doesn’t count. They have a job to do on behalf of the ATO.
Why should an auditor risk his business and livelihood because of your belligerent attitude?
There are billion$ frauds thanking place in the US with crypto,read about it.
The problem with people like you is that you assume super is “your money” and don’t like people telling you what to do.
It’s not your money until you retire, that’s the rules. Try and find a large fund that invests in Crypto and exit your SMSF. You won’t because you can’t. The trustees of large funds understand their responsibilities to members.
If you want to gamble use your own money. Go to the casino, it’s quicker and tax free!
I am acutely aware of what an audit of a SMSF is about and am acutely aware of the Sole Purpose of an SMSF – to provide benefits to its members in retirement. There is no longer any question that crypto is its own asset class. Its risk profile is substantially higher than that of most other asset classes, which lends itself to those with either a substantially longer investment time horizon and/or higher risk tolerance. The focus of your argument continues to be on crypto exchanges. I have admitted already that exchanges need to do better, however there are a myriad of ways that SMSF trustees can self-custody the crypto assets they choose to purchase for the benefit of its members. These assets are on public, immutable blockchains that can be verifiably proven as to their existence by anyone, not just SMSF auditors.
SMSF trustees need to have both the knowledge and the ability to sign their own transactions (or appoint a custodian to store their assets for them) so that they don’t fall victim to the many scams out in the wild. Large funds (as well as financial advisers) cannot invest or advise in this asset class because they are hamstrung largely by AFSL regulations – not by tax or SIS legislation, where it is silent on restrictions to crypto investments. SMSF trustees are burdened by AFSL regulations as they are acting in accordance with the rules of the deed and in the best interests of its members. If you don’t understand how it works, either learn more about how the technology works or keep your misinformed opinions on the space to yourself – for the benefit of all participants.
It’s NOT an investment! It’s 2 flies crawling up a wall!
[i]”they can offer solutions and work with SMSF trustees to get the fund compliantly holding crypto assets”[/i]
Why is this the auditor’s job? Shouldn’t this be the responsibility of the exchanges holding crypto on behalf of their clients? Or is that too much to ask.
The USB flash drive approach is a much safer way than having the wallet on an online exchange. If the auditor wants you to keep your crypto wallet online at an exchange, then the crypto is at risk of being hacked and stolen. If the private key is only on a USB stick and nowhere else then it is a lot safer. The whole point of cryptography is keeping the private key secret.
Would the auditor be liable for recommending keeping the crypto online and the exchange gets hacked or halts withdrawals? That is just real bad advice from the SMSF auditor.
The auditor simply wants independently verifiable proof of the asset’s existence, ownership and value. Same as they do for shares, bank accounts and real estate. As the Trustee, it’s up to you to provide the means for them to do that.
Just because the SMSF outlayed the money is not even proof that an actual transaction took place, let alone proof of existence or ownership.
If you don’t want to be subject to that level of scrutiny, then don’t put Crypto in your SMSF. Pretty simple, really.
I broadly agree that crypto shouldn’t be held on exchanges. It is up to the SMSF trustee to responsibly store the keys to those assets should they choose to self-custody and the solutions to recover assets are getting better. Setting up smart contract wallets with either multi-sig or guardians for social recovery are great steps in the right direction.
That said, the operators of the legitimate Australian based exchanges could also do better for SMSF clients. Offering a custody service, where all crypto assets for the fund are in a separate wallet that can be verified by an auditor, would be a huge opportunity for these operators. Perhaps the money just isn’t there yet. Hopefully this becomes a reality soon though.
[quote]Where would you like us to hold our crypto assets then???[/quote]
They don’t want to see crypto assets at all. Too much work for them!
[quote]they throw scary misinformed words[/quote]
It’s OK. It got you to read the article, comment and engage in a debate.
My audit was qualified for Part A cuz my auditor wanted the crypto platform audit report like a portfolio valuation report. That is just not right. More needs to be done to regulate this space.
Or perhaps you need to ensure you comply with the law
That’s how it should be Natalie. The auditors job by Australian law is to certify that your investments exist and are correctly valued.
If you’d fund owns shares, they cannot rely on your brokers report, it’s just a piece of paper. They have to verify the holdings with each share registry. For real estate, they have to do a title search.
For Crypto, the auditor gets a piece of paper, with no way to verify it’s true or not, and you want them to trust the faceless people at a crypto exchange.
In the past auditors have been successfully sued for not qualifying their audit report on investments that they couldn’t confirm, but later fell over or turned out to be a scam.
The auditor has a family too and he doesn’t want to be sued by you if your crypto provider is a scam. You should google some of the crypto scams that have happened in the USA. Some of these big flashy platforms have just taken peoples money, and spent it on their lifestyle and just pump out meaningless reports to cover their tracks. How can an auditor know what is real or not? A Part A Qualification puts the risk back with you. Don’t expect the auditor to take risks on your investing. That’s not fair.
I have shared some thoughts on exchanges, investor protection, interim solutions (incl. self-custody) and education (both clients, accountants, auditors and financial advisors) below – feel free to check them out.
While I side with auditors RE: qualifying Part A when assets are held on exchanges, I would also make an educated guess that the auditor Natalie had engaged also had no idea as to how this could be resolved and that is probably her biggest gripe.
I would also be careful as to tar the legitimate operators of this industry with the same brush you tar the scammers. There are plenty of messed up schemes involving SMSFs I have experienced in literally every asset class – real estate being the worst.
Most of the crypto providers in Australia are exchanges which hold the “wallet” on behalf of a SMSF, which means they are in fact a “custodian”.
The auditor of any other custodian investment such as platform investments, is required under Australian Auditing Standard GS007 to obtain the independent auditors report into the custodian as “comfort” that the investments are in fact held.
Crypto exchanges aren’t audited and aren’t compelled to be. As long as they remain on the fringe of Australian investment regulation, their list of crypto-currency coins provided to the SMSF auditor are nothing but “a worthless piece of paper”, a theme common to the biggest of the ponzi schemes.
Auditors need to take a harder look if they are not qualifying part A of their audit reports, and most are not from what I have seen.
We are headed for a major crypto/smsf fraud in this country unless the crypto exchanges self regulate or are regulated by Government and are required to be audited and provide that report to investors.
Nobody ever wants more regulation, but this is the one time that SMSF investors really do need to be protected from themselves.
I agree that exchanges can do better. Until they start offering a type of “allocated vault” system (even if just for SMSF customers), the most logical solution is for SMSF trustees to either take custody of these assets in wallets they have control over.
I can’t speak on behalf of other SMSF auditors, but the one we engage is qualifying Part A of their reports.
To your point on SMSF Investor protection, the biggest issue comes down to education, not regulation. I am arguably a very degenerate participant of the crypto ecosystem but I also only own Bitcoin (BTC), Ethereum (ETH) and a range of stablecoins that earn passive income in Decentralised Finance (DeFi) lending pools in my SMSF; something that would be considered very risk-off in terms of crypto asset allocations. Most of that is because I am well educated on both the technical and the regulatory landscape. I also want to take some risks while I am still young but also want that risk to be informed and measured.
There is not enough education coming from the accounting and financial services industry on these assets because so many of them either don’t understand it or are too scared to say anything about it (perhaps due to professional indemnity). SMSF Trustees then resort to sketchy individuals online that have grown influential followings for advice in this area and are led down a very treacherous path. We, as an industry, also to play a role to better educate our clients if we want them to see success in this asset class.
I would have thought an online account (in the fund’s name) with no guarantee of the accuracy of the year end statement would be more risky and difficult to audit than a physical wallet with a verifiable public address kept in a secure location (in a safe/vault). If the fund purchased the crypto who else would own it? Same issue on ownership with a gold bar for instance. I would read “increased risks” as “keep away” & ignore the hype.
Agree with you Jim. There is an inherent risk with the exchanges as platforms whereas externally held crypto assets are traceable and verifiable via blockchain explorers.
Absolutely zero substance to this article. Why is the SMSF Adviser continuing to smear the crypto industry?
[quote] “It wasn’t on an online account, which meant that there was no ownership or way of verifying who it belonged to. It was whoever had custody of the [USB flash drive] and the password” [/quote]
Firstly, this is why we prepare documents to assert ownership over wallets that otherwise have no identifying information attached to them by design (it’s a feature, not a bug). Secondly, auditors also seem to have a hard time grasping the concept of crypto assets held on exchanges. They are adopting the approach of a gold vault, in that unless another auditor can verify that asset’s existence in a particular wallet that is controlled by the exchange for a particular account holder, it cannot be 100% accurate.
Where would you like us to hold our crypto assets then???
None of the information coming from these articles are from people who actually spend their time in this space. They don’t understand the industry, so they throw scary misinformed words around in the hopes that people will be scared off investing their super in this asset class.
Please do better.
We prepare documents to assert ownership . . . it is a feature not a bug . . . . That is like telling an auditor I have $1M in a bank account “trust me”. It would be more beneficial if you were able to advise on what other proof of ownership exists for this type of asset. A custodial declaration is lightweight proof. Is there something else you can share with the forum? The thrust of the article is that many trustees don’t understand the nature of their investment and the legal requirements. If you want to help people to invest safely in this product/market, and you have obvious knowledge, then provide constructive feedback so that investors and trustees and auditors better understand and maybe help develop the audit trail.
Regardless of what information you provide, you are asking the auditor to trust you. Your word is not acceptable. That’s not an insult, it’s just how audit works.
Ownership of investments needs to be verifiable independently of you.
For example, a brokers report can be independently confirmed as shares at registries. The only way to audit a custodian arrangement is to obtain a copy of the audit report into the custodian. That’s not a direct confirmation but it provides some comfort that you have been independently examined and what you say and info you produce can be relied upon.
All IDPS/custodian arrangements are so audited in Australia. Crypto platforms are not.
Your industry association would be wise self regulate to require annual audit for their members, before Government has to step in and mandate it for you, and probably a whole lot more regulation to boot. History shows that they will, is just a matter of time unless you self regulate.