What are crypto risks for SMSF Administrators?
How is Crypto a Risk to SMSF Administrators?
Investing in cryptocurrency within a Self-Managed Super Fund (SMSF) in Australia introduces a unique set of risks for administrators. While the Australian Taxation Office (ATO) has confirmed that cryptocurrency can be a legitimate SMSF investment, strict compliance with superannuation laws and diligent management are essential.
Will an SMSF Pass Its Audit with Insecure Crypto Security?
One of the biggest, often overlooked issues is whether the fund’s crypto assets are secure. Cryptocurrency security is notoriously inadequate, and an SMSF auditor cannot pass an audit if they believe the fund’s assets are held insecurely.
An SMSF auditor’s role is to assess whether the fund’s financial records are accurate and whether it complies with the Superannuation Industry (Supervision) Act 1993 (SIS Act) and related regulations. Holding assets insecurely likely breaches these laws, and auditors have a duty to report such risks.
Currently, many crypto security solutions—whether self-custody or exchange custody—are vulnerable to hacking. Financial institutions now expect blocked crypto withdrawals and licensed custody. For SMSFs, this should be the minimum standard to pass an audit.
Key Crypto Risks for SMSF Administrators
1. Compliance with Superannuation Law and the Sole Purpose Test
Sole Purpose Test: The most critical risk is failing the “sole purpose test.” An SMSF must exist solely to provide retirement benefits to its members. Crypto investments cannot be used for personal gain, and fund assets cannot be commingled with personal assets. Administrators must ensure that all cryptocurrency is legally owned by the fund, not by any member.
Investment Strategy: The fund’s strategy must explicitly allow and document cryptocurrency investments. This includes explaining how crypto meets fund objectives, why a high-risk asset is included, and how risks like volatility will be managed. Administrators must ensure the strategy is current and regularly reviewed.
Related Party Transactions: SMSF rules prohibit the fund from acquiring or selling assets to related parties. This means crypto cannot be purchased from a member or their relatives.
2. Record-Keeping and Auditing Challenges
Meticulous Record-Keeping: Crypto transactions are decentralized and often complex. Administrators must maintain detailed, audit-ready records of all transactions, including purchase costs, sale proceeds, and capital gains or losses.
Demonstrating Ownership: Proving that crypto is owned by the SMSF and not by a member is critical. This may require a dedicated bank account, a crypto wallet in the fund’s name, and legal documentation such as a deed of trust.
Valuation: All SMSF assets must be valued at fair market value at the financial year’s end. Given crypto’s extreme volatility, accurate and verifiable valuation can be challenging.
3. Security and Custody Risks
Loss or Theft: Unlike traditional assets, SMSF trustees are often responsible for securing their digital assets. This includes risks from cybercrime, exchange hacks, or lost private keys.
Account Hack: The only truly secure solution is blocked crypto withdrawals. Other methods, including 2FA, are insufficient.
Licensed Custody: Self-custody is widely considered insecure due to lost devices or passwords. Exchange custody is also risky, as no exchange can fully cover catastrophic losses. Licensed custody, offered by regulated institutions like Zodia (owned by Standard Chartered and NAB), is now the industry standard. Fireblocks, while popular, is a custody software provider that relies on Zodia for institutional clients.
Exchange Collapse: The crypto market is largely unregulated. Exchanges can collapse or be defrauded. Administrators must ensure trustees understand these risks and select reputable exchanges.
Institutional-Grade Security: With financial institutions entering crypto, the concept of “institutional-grade security” has emerged. This includes licensed custody and blocked withdrawals—the minimum security now expected for SMSFs and available to everyone through platforms like Wealth99. Failure to adopt this standard could create liability for administrators.
4. Tax and Regulatory Uncertainty
Capital Gains Tax (CGT): The ATO classifies cryptocurrency as a CGT asset. Every disposal, whether selling for cash or exchanging one crypto for another, constitutes a CGT event. Administrators must track cost bases and calculate tax obligations accurately, including discounts for holdings over 12 months.
Evolving Regulatory Landscape: Australian crypto regulations continue to develop. Administrators face the risk that ASIC or ATO guidance could change compliance requirements, demanding constant vigilance.
The Takeaway
While SMSFs can invest in cryptocurrency, its decentralized and volatile nature, combined with strict legal, reporting, and auditing obligations, creates significant risks for administrators.
SMSF Administrators who do not require institutional-grade custody for fund assets may expose themselves and their clients to unnecessary financial and legal risk. Platforms like Wealth99 provide regulated, institutional-grade security designed to safeguard SMSF crypto investments, making compliance and audit readiness achievable while mitigating exposure to theft or regulatory breaches.
If you need assistance or want to learn more, our Specialist team is here to guide you. Feel free to reach out anytime for support or more information.