SMSF. Crypto. Bitcoin. What’s all the fuss?

Why is there so much focus on SMSFs and Bitcoin? Mainly because it’s new and sexy. 

Whenever there is a new and exciting investment, early movers want to get started. These days, the largest pot of potential investment cash is often an individual’s superannuation. Thanks to compulsory superannuation at a relatively high level for a long time now, even youngsters in their 30s and 40s potentially have large sums locked up for retirement.

(Did you know that someone with a salary of $50,000 ten years ago who has experienced wage increases of only 3% each year could have grown their superannuation to around $50,000 today if their fund earned even just 2% more (ie 5% pa) over that period?)

But how does one invest superannuation money in Bitcoin?

This is where SMSFs enter the conversation.

On the whole, large funds are subject to exactly the same rules as SMSFs (in fact SMSFs are generally more constrained) but a range of factors get in the way of quickly opening up new opportunities for large fund members. Internal policies that apply thorough vetting to anything new, governance committees that are nervous about taking risks, trust deeds or other internal documents that simply prohibit it, concerns about additional costs (which would end up affecting all members not just the few who take up the new opportunity) to name just a few.

SMSFs, on the other hand, can respond to anything immediately. Want to buy diamonds? Want to buy mushroom farms? Want to buy racehorses? Want to buy Bitcoin? There will almost always be compliance hoops to take care of and in a few cases, there are specific rules governing particular types of investment. 

But there are generally very few assets an SMSF cannot buy at all.

This “nimbleness” is exactly one of the things that sets SMSFs apart from the rest of the slow and ponderous superannuation industry.

And sometimes that’s the problem. There’s very little to stop someone in charge of their own superannuation fund racing headlong into an exciting new thing. But there is also virtually no protection when something goes wrong.

Some people will make a killing on cryptocurrencies. And some people will lose their shirts. 

Given the very generous tax concessions given to superannuation funds including SMSFs, we shouldn’t be surprised that the ATO (as the regulator of SMSFs) and auditors of SMSFs (as their whistle blowers) tend to instinctively view anything new with concern. Sometimes that concern is just based on ignorance. Sometimes it is founded on a genuine appreciation of risk and fear that some people making important investment decisions actually do not understand what they are doing.

Right now both are probably applicable for cryptocurrency.

Not surprisingly there are plenty of articles currently being published expressing concern about cryptocurrencies. The best I’ve read so far is this one from ASF Audits – Why Cryptocurrency is SMSF Kryptonite. 

But there are also plenty in support and highlighting some points that are absolutely true:

• An SMSF can invest in cryptocurrency providing some important compliance rules are followed.
• The technology underpinning cryptocurrency is surely here to stay – regardless of whether the large range of specific currencies (Bitcoin, Ethereum, Dash, Monero and more) survive in their current form.
• As George Bernard Shaw said once "all great truths begin as blasphemies". Everything was new once and many activities that are somewhat mainstream today were probably once viewed with the same suspicion that now surrounds cryptocurrencies. As entities that are always on the front line of innovation, SMSFs experience this a lot!
• As mentioned earlier, some people will make a killing investing in these assets.

I have an SMSF and I won’t be buying cryptocurrencies for now for several reasons:

• I don’t really understand it well enough to be confident I would be making an informed decision. My adviser doesn’t either – so I’d be on my own;
• I’m kind of intrigued about it and would actually love to have a dabble “just because” – but that’s exactly the wrong thing to be doing with my retirement savings. I should do that with my own money otherwise I’ve breached one of the most important superannuation rules we have: the sole purpose test.

But this isn’t something just restricted to crypto - my SMSF doesn’t have any direct property for exactly the same reasons!

On the other hand, my colleague Andrew Smith is our CTO. He knows far more about this than I do. In fact he’s even played around with inventing his own currency and knowing his history with new and innovative ideas, he will probably be one of the people to make a killing! It may be an entirely appropriate investment for his SMSF. If he does invest some of his superannuation money in some form of cryptocurrency, I’ll be flagging just a few things I want him to be careful about:

• Make sure you are doing this with a genuine focus on growing your retirement savings – if you just want to have a play, it will be very hard to look your auditor and the ATO auditor in the eye and say you’ve satisfied the sole purpose test. This is particularly hard if you have JUST created your SMSF and put all your money into Bitcoin. Would someone genuinely focused solely on growing their retirement savings put all their eggs into that particular basket?
• Your SMSF needs to be able to prove that it owns what it says it owns – this is pretty easy in the “non virtual” world where things like bank statements, share registers etc provide some conventional methods of supporting ownership;
• Cryptocurrency isn’t currently included in the definition of “money” for superannuation law purposes. This means there are rules about who you can buy it from – only ever buy your coins from an external party, not yourself or family or people you’re in business with;
• Make sure you can show how you are protecting yourself from fraud or natural events such as the death of the trustees (who own the wallet);
• Remember that the assets will belong to the superannuation fund. If your sell some of your Bitcoin, the money needs to go into your SMSF not your own pocket. You also can’t spend it on things for you (or family or anyone else) – it can only be spent on buying things for the SMSF.

Other than that, go for your life and make a killing!

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