This article is part of our special report on digital risk in family offices.
Investing in cryptocurrencies comes with risks—most obviously, that their value will fluctuate or perhaps drop to nothing in a volatile market.
But investors also face security risks, as these purely digital assets can be exposed to loss, theft and succession issues. For family offices, managing these risks means focusing on custody options, according to experts in handling crypto-investments and wealth advisors with clients involved in the asset class.
“Losing Bitcoin or cryptocurrencies is absolutely devastating, because there is nothing you can do. It is irreversible,” says Ben Perrin, CEO of BTC Sessions, a Calgary-based company that teaches people how to obtain, secure and use Bitcoin in particular.
When you store Bitcoin on an Internet-connected device, it’s known as a hot wallet, he says, because the credentials to spend are vulnerable to digital attacks and hacks. “This is fine for small amounts and day-to-day spending, but inadvisable for sizable amounts,” Perrin says.
The solution is to use a hardware, or cold, wallet, which keeps your spending credentials stored safely on a specialized device that is never directly connected to the Internet, he says. “This mitigates the risk of a threat actor remotely targeting your funds and leaving you with nothing.”
Various options for these wallets can be found on the market; with them, recovery can be as simple as using a “seed phrase” of 12 to 24 randomly generated English words. “Think of this as a spare key to your digital vault,” Perrin explains, adding that it’s critical to take extra steps to ensure that such sensitive information is kept away from prying eyes and yet passed on to the appropriate party or parties in a family office.
Some people write them down, others even stamp them onto a steel plate so they’re retrievable in the event of a house fire, Perrin says. “The most advisable thing is to keep the device and the written backup somewhere separately, because it’s unlikely you’re going to get two house fires in different locations at the same time.”
There’s going to be a period of time where it’s a bit of an arms race, where people that are building wallets are trying to stay ahead of people building the things to break the wallets.
Ben Perrin, BTC Sessions
Who should know the seed phrase? Perrin says you can leave it with a family member, lawyer or your executor, but you can also establish an additional pass-phrase that has to be used at the same time, and give it to someone else, or even use a digital vault that requires multiple keys, with a combination of these keys providing access to the funds.
“It’s really a ‘choose your own adventure’ type of thing,” he says.
‘A game changer’
Arthur Salzer, founder and CEO of Northland Wealth, based in Oakville, Ont., and Calgary, says the company’s 55 client families are invested in Bitcoin through exchange-traded funds. There is still custody risk with public securities that invest in crypto because they require “proper key management,” he says, noting that this should be audited and institutional.
Some of Salzer’s clients invest in cryptocurrencies directly, and he recommends that those who opt for self-custody use expert services like Perrin’s as a resource for education.
“People who hold Bitcoin are holding a source of wealth outside of the financial network,” he says. “If you have Bitcoin with properly managed keys, then nobody can take that from you, and that’s a game changer.”
Michael Zagari, a Montreal-based portfolio manager at Wellington-Altus Private Wealth, says that when it comes to estate planning for people with Bitcoin, “the executor needs to know exactly where this money is,” because the family likely won’t know how to handle or transfer it. “The last thing you want is for this wealth to be trapped.”
Managing what you bought on a crypto exchange and then transferring the assets to a cold storage wallet means “you’re responsible for your own custody of your digital assets,” Zagari points out. Whom you trust with that information is very important. “If you’re going to work with someone that’s not a fiduciary and you give them your keys, then it’s like giving them the alarm code and the keys to your house,” he says. “In some cases, it’s like leaving the door open and putting a sign on your front lawn saying, ‘Come in.’”
Don’t assume your children are the best holders of keys, “because they don’t have a fiduciary duty to work in your best interest,” warns Zagari, who expects the acquisition and custody of cryptocurrency to become “a very hot topic” among family office-type investors in the coming months.
“Right now most investors are saying, ‘I’m going to buy an ETF to get the exposure and not have any responsibility for the security and keys,’” he says, which will change when Canada implements a regulatory framework that brings clarity to digital assets.
“Once people start to hold their own crypto, then you’re going to have to have a whole estate plan built with that in mind, because those assets are not going to be easy to find,” Zagari comments. “You’re going to have to label it and know that it exists, separated from your stocks and your bonds and all that.”
He notes that for now, only niche high-net-worth investors have direct exposure to Bitcoin self-custody, “because they have the sophistication and they understand the complexity and the risks involved and they’re comfortable with doing it.”
Zagari predicts that “there’s going to be a point in time where the market’s going to stress-test investors’ adoption and appetite for self-custody of digital assets.” He expects most investors will still opt for a middle ground, with a service that offers crypto, stocks and other assets and acts as the custodian of them.
A learning curve for self-custody
Michael Rosen, Chief Business Officer of JAN3, a global Bitcoin technology company focused on expanding access to Bitcoin and financial freedom around the world, says people “need to learn how to self-custody Bitcoin,” just as they follow rules about how to handle gold. “There’s a lot of parallels between Bitcoin and gold; it’s coming to fulfill the same role that gold did, which is to preserve your wealth and to be a hedge against inflation, just in a digital form.”
Having private keys on a laptop is not something anyone would recommend.
Didier Lavallee, Tetra Digital Group
Self-custody means “you can actually hold your own money without trusting anyone, which is the highest form of security,” Rosen says. “Then only you have access. Nobody can take it from you.”
Having sole responsibility for your Bitcoin involves a learning curve and can make people “afraid of it because it’s so new,” he says. The best approach is to start small, for instance buy $100 worth of Bitcoin “just to see how it works, and then the fear barrier gets broken.”
Those who do not wish to learn about self-custody can use custodians that specialize in helping individuals secure their Bitcoin. “It’s kind of like an escrow. They can’t touch the funds,” he explains. “These are small companies of advisors that help you to set up your private keys in case of death in the family, inheritance and so on.”
Take the time to speak with the company and get references, he says. “Just like any advisor, you need to create trust.”
Ultimately you will have what amounts to a key that you split into a few parts and give to different parties, Rosen says. In a simple example, “one can be your spouse, one can be that escrow company and one can be you.” If something happens, you need only two out of the three keys to get to the Bitcoin.
Rosen adds that keeping Bitcoin on an exchange, a type of custodian that requires you to remember an email and a password, can be “highly risky. Every year there’s an exchange that gets hacked.”
Perrin points out that exchanges can become targets because “it takes the same effort as targeting an individual, but yields a far greater reward.” He refers to them as “honeypots for hackers.” He cautions that family offices using exchanges could also be exposed to rehypothecation, where their funds are re-lent, and other counterparty risks.
Once people start to hold their own crypto, then you’re going to have to have a whole estate plan built with that in mind.
Michael Zagari, Wellington-Altus Private Wealth
ETFs that hold Bitcoin can come with security issues, Perrin notes: “You should still be watching them.” He feels it’s revolutionary for people to have digital sovereignty over their own Bitcoin, without the counterparty risk posed by banks and other institutions having responsibility for their assets. “This is a huge leap forward, because now you can partake in the global digital economy without having to trust an intermediary.”
Estate planning and custodians
Didier Lavallee is founder and CEO of Tetra Digital Group, an institutional service provider for digital assets based in Calgary that operates a regulated trust company that offers custody for cryptocurrencies. He says more family offices and high-net-worth individuals are allocating a portion of their portfolio to Bitcoin and other cryptocurrencies.
What happens if you’re incapacitated or you die and your crypto is held on your phone? Lavallee says that if you’re using your phone, the odds are that in Canada, you are likely using a regulated service such as Wealthsimple and there should be a recovery process for the succession of your cryptocurrency. However, if you are maintaining your own keys, it’s important to work with your estate planner to ensure there’s a recovery plan. “Absent a recovery plan, the crypto would be lost,” he says.
In the files that Lavallee’s company has been involved in, the family office typically sets up a key management structure that includes such a recovery plan.
Holding crypto on a laptop is not an issue, he says, but “having private keys on a laptop is not something anyone would recommend.” Private keys (a string of alphanumeric characters) should be held in physical form, he says, such as imprinted in steel and secured via the highest security standards—a safety deposit box, for example.
Some family offices may choose to do this themselves, but it’s better to work with a regulated trust company that can act as custodian of digital assets, Lavallee says. “This ensures there’s a recovery process, insurance and the highest industry standards are applied.”
Family offices should also consider jurisdictional risk when selecting a custodian, he cautions, as the crypto would be subject to the laws where the custodian operates.
The space has received “regulatory clarity” and been de-risked in recent years, Lavallee says, reducing the likelihood of issues arising. “That being said, as with all new financial products, allocators should ensure they understand the risks when making the investment.”
In the future, Perrin says, “there’s going to be a period of time where it’s a bit of an arms race, where people who are building wallets are trying to stay ahead of people building the things to break the wallets.”
He notes the emergence of new automated sovereign solutions, technologies in which you can lock your cryptocurrency in a digital vault that “allows for the automated triggering of fund transfers so that only the intended recipients can gain access at the appropriate time,” he says, for instance following your death.
Meanwhile, Perrin sees the characteristics of crypto buyers changing, from the “individual retail gambler” to investors with long time horizons who consider it digital gold and are looking for security solutions.
“There’s lots of innovation happening.”
Mary Gooderham is a writer, editor and communication advisor based in Ottawa. She leads Cohen Gooderham Communications and has worked as a journalist for more than 40 years at The Globe and Mail, as a recording officer at the International Monetary Fund and as a custom content creator for online and print media. She’s been a contributing writer at Canadian Family Offices for four years, focusing on investment strategy, trusts, philanthropy, women in finance and estate planning.
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