Crypto-IRAs – A Challenging Balance of Security, Compliance, and Client Experience
The internet has optimized commerce such that common goods, from groceries to auto parts, can arrive on our doorsteps with the push of a button and in a matter of days (or hours). The same can be said for self-directed retirement accounts; investors can incorporate physical holdings like real estate and precious metals into their IRAs and 401(k)s more easily with advancing technology. So why can individuals initiate alternative retirement investments online, but doing so with cryptocurrencies—purely digital assets traded exclusively through online channels—hasn’t been as simple? The tremendous potential of cryptocurrencies has prompted investors to explore options for IRA allocations, but IRA companies have been wary of taking on custody of these assets. IRA providers must ensure their control of digital holdings and be cognizant of a regulatory landscape surrounding cryptocurrencies that fluctuate as rapidly as the price of Bitcoin. To capitalize on the sometimes volatile price changes that characterize this investment space, digital currency investors demand expeditious transaction processing and a seamless interface between their retirement accounts and their desired wallets and exchanges. IRA providers must, therefore, put measures in place to custody an asset whose hallmark is a lack of central control, a conundrum for which a full-service solution remains in development.
IRA providers have researched available procedures for transacting and storing digital currencies with retirement accounts. Some of the existing models being used are:
Multiple Key Verification
This storage system involves multiple entities that respectively hold one of several keys tied to a particular account. Only once a certain number (typically a majority) of the keys are “turned” will a given transaction be approved and executed. Safeguarding these keys can help prevent cryptocurrencies from falling into the wrong hands, though possibly at the expense of processing times. This would depend entirely on how well the various key holders coordinate their activities.
Cold storage devices can offer an alternative hedge against theft attempts. Held assets could only be accessed by plugging the hardware into another computer, so the cryptocurrencies held therein could remain secure as long as the device itself and the corresponding recovery phrase are safely stored. However, transaction times may again suffer and a third party may have to interact directly with one’s retirement holdings. IRA holders cannot personally retain any assets owned by their IRAs, so any IRA-owned hardware devices would have to be housed at a separate storage facility. Personnel at such a facility would have to conduct the cryptocurrency transfers unless the cold storage device travels between the depository and the exchange (a process that carries its own risks and expenses).
Limited Liability Company (LLC)
Retirement investors may establish an LLC on behalf of his or her IRA, fund it with retirement dollars, and invest as they see fit. Checkbook control under this model would afford investors the flexibility to acquire and store digital currencies with the providers that suit their individual needs. As in most matters, this freedom will also bear added responsibilities. Namely, it is prudent to stay clear of prohibited transactions which could result in a forcible distribution of IRA holdings and put the account holder on the hook for taxes and/or penalties.
As you can see, an ideal model for IRA-owned cryptocurrencies has yet to be determined. As we saw on the internet during its infancy, new technology, economic potential, security, and the need for efficient procedures may struggle amongst themselves until a harmony can be achieved. A scalable, cost-effective process for investing in cryptocurrencies with an IRA or 401(k) can’t arrive soon enough for most investors, and I can assure you the solution is in the works.