The Evolution of Bitcoin Wealth Management

Bitcoin is a peer-to-peer electronic cash system, a network driven by open-source code developed by Satoshi Nakamoto. Since its release in 2009, Bitcoin has persisted as a reliable, efficient, private, disintermediated medium of exchange. And yet, from the beginning there were clues that Satoshi intended it to be something more. In the years following its release, Bitcoin has become an unmatched store of value and the foundation of tremendous wealth capable of spanning generations. A protocol that started as a cypherpunk experiment in peer-to-peer money has now established itself as the bedrock of generational wealth for many early adopters. It has evolved into a monetary system that is more than a brilliant, decentralized form of peer-to-peer electronic cash. Bitcoin’s programmatic supply decay rate — the function within the Bitcoin software that halves the rate of issuance of new bitcoins on the network every 210,000 blocks roughly every four years — makes it an unparalleled store of value against traditional forms of unbacked ‘fiat’ currencies.

From Currency to Generational Wealth

In its brief history, Bitcoin has grown into a multi-trillion-dollar asset class and bitcoin owners’ sophistication around key management has not kept up with this economic reality. Those who have accumulated bitcoins at scale must adapt the method by which they control the ownership and movement of their bitcoins to account for the fact that the value of bitcoin likely goes up forever in fiat currency terms. A blend of key mechanisms is necessary to strategically manage bitcoin across its various uses. Low-friction, unilateral, and otherwise tax-neutral controls are acceptable for ‘transactional’ bitcoins intended to be spent. Higher friction, tax-optimized, legally-protected controls are necessary to preserve and transmit generational wealth.  

While many Bitcoiners bristle at the prospect of surrendering unilateral, ‘sovereign’ control over their bitcoin, they confuse the principle of disintermediated confirmation of transactions with the idea that sovereignty begins and ends with the ability to directly control peer-to-peer transactions. This mindset is trapped in 2009. It is held hostage by the idea that bitcoin is no more than a medium of exchange.  

An evolved approach to key management is not contrary to Bitcoin’s value as a peer-to-peer medium of exchange. Rather, it is a recognition that Bitcoin’s superior design as a form of money gives it a tendency to rise indefinitely in terms of fiat currencies and as such, warrants thoughtful treatment and structure in societies governed by laws. So long as bitcoin is subject to the tax laws of various nations and until those who inherit large sums of value in wealth can reliably manage that wealth without risk of mismanagement or other permanent loss, holders of significant wealth in bitcoin must evolve their thinking when it comes to managing their holdings.

The concept of sovereignty must mature beyond unilateral control of cryptographic private keys to an upgraded, more complete form of sovereignty. Upgraded sovereignty contemplates using resilient, legally-recognized ownership regimes, and exploiting opportunities in favorable jurisdictions to achieve tax efficiency, asset protection, robust privacy, and inheritance preservation.  

Asset Protection Through Legal Structures

Asset protection from creditors is a key consideration in this evolved approach to key management. Individuals with consequential wealth — and particularly those in high profile or high liability professions — are often justifiably concerned that third parties may initiate litigation that exposes their wealth to risk of loss. Powerful creditors can arise in many contexts, some expected, and others quite surprising. In seeking to insulate assets from the claims of potential creditors, a wide range of strategies, including basic ’homestead’ exemptions, corporate veils, US domestic irrevocable trusts, and non-US entities and trusts, provides varying levels of protection.

To the extent bitcoin is properly titled to a trust, foundation, LLC, or similar entity, the bitcoin can be shielded from the claims of creditors to the same degree as other assets. But in all cases, the bitcoin owner must 1) establish an appropriate legally-recognized strategy, 2) sever dominion and control over the bitcoin, 3) establish fiduciary title ownership within the legally-recognized strategy, and 4) rigorously maintain compliance of the strategy to benefit from its protective veil. 

These protective benefits cannot be achieved while an individual maintains unilateral, ‘sovereign’ control over their private key material and mature bitcoin sovereignty relies on wealth management strategies that provide tailored, thoughtful, experienced planning and active support. It leverages advanced legal, financial, and global market understanding. A broad spectrum of key management and title ownership regimes must be applied to address a bitcoin owner’s competing objectives for high velocity-low friction spending and cross-generational, tax optimized, protected inheritance planning.

While Bitcoin’s future remains unwritten, it is foreseeable that Bitcoin continues its trajectory of value growth when measured against loose monetary policy within fiat-based money systems. Bitcoin’s evolution to a higher form of money requires a clear-eyed, pragmatic approach to structuring key management systems and title-held ownership structures to mitigate against permanent loss due to avoidable tax erosion, mismanaged inheritance, failed programmatic code-based solutions, confiscation from tax evasion or litigation, and other existential risks to personal wealth.

Note: This article is an abstract from the original white paper titled The Sovereignty Paradox