SMSFs holding cryptocurrency in cold wallets stored offline may struggle to prove to an auditor the fund owns the asset or that it even exists, an SMSF administrator has warned.
Heffron client relationship manager Sean Johnston said the holding of cryptocurrency wallets at the time of an SMSF audit was an issue often encountered by Heffron, with people asking what evidence was required to prove the existence of the cryptocurrency held in a cold wallet.
Johnston said cold wallets, which stored all information offline, differed from hot wallets, where the assets, proof of ownership and transaction records were accessible via an online portal, and warm wallets, where the assets were stored offline but accessed through software linked to a registry or crypto trading house.
“For hot and warm wallets we can get enough information to prove the existence of the crypto assets. It may not be audited information, but you can get things like reports and screenshots to give to an auditor to prove that these things exist and existed at a point in time,” he said during a recent online briefing.
“With cold wallets that are completely disassociated from the grid, I don’t think there is a way you can prove existence short of sitting with the auditor and accessing the wallet at that point in time or giving them the wallet so they can access it.
“You’re certainly not going to do the second one. You are not giving them the access key because that’s like having access to your bank account.
“The only option is to sit with them and show them what is in the wallet and that’s not going to be a realistic solution for most people.”
He said this approach may be a higher standard than that of some SMSF auditors who may accept screenshots, transaction histories and statutory or trustee declarations, but he did not think cryptocurrency in cold wallets could be properly audited.
“If I had a fund that had a completely cold wallet with a majority of the fund’s assets tied up in crypto, I think that’s an unauditable fund and an auditor would have to disclaim their opinion at that point, but I am probably on the harsher end of the spectrum,” he said.
Heffron SMSF technical and education services director Leigh Mansell said providing proof in this instance was comparable to an SMSF trustee stating they had gold bars at home being held for the benefit of the fund.
“I don’t know how an auditor can sign off on those bars without qualifying the audit. How do you prove to the auditor you physically have those gold bars sitting at home? It’s the same sort of logic,” Mansell said.
“This is another thing to warn clients about that if you want to buy crypto, you are going to have a problem with your auditor if you can’t give them the evidence that they need. Keep ramming that home because how many times will it take for a qualified audit opinion to become a problem.”