Cryptocurrencies and digital assets—such as bitcoin, ether and non-fungible tokens (NFTs)—have become some of the hottest investment products in recent years. The growing interest has inevitably led to retirement plan participants and individual retirement account (IRA) owners wanting to invest their tax-deferred retirement assets (plan assets) in cryptocurrency. Investing plan assets in cryptocurrency is complicated, however, because of the complex rules that federal law imposes on fiduciaries of retirement plans and IRAs.
On March 10, 2022, the US Department of Labor (DOL) issued guidance for the first time on the investment of retirement plan assets in cryptocurrencies. Compliance Assistance Release No. 2022-01 cautions 401(k) plan fiduciaries to “exercise extreme care” before allowing participants to invest plan assets in cryptocurrencies because cryptocurrencies “present significant risks and challenges to participants’ retirement accounts, including significant risks of fraud, theft, and loss.” The DOL expects to investigate 401(k) plans that allow participants to invest their plan accounts in cryptocurrencies in order to protect participants and beneficiaries from the risks inherent to investing in cryptocurrencies.
WHAT IS CRYPTOCURRENCY?
Virtual currency (also referred to as “cryptocurrency,” “digital assets,” “tokens” and “digital currency”) is said to have been created in 1998, but it was not until bitcoin’s introduction in 2009 that virtual currency gained international notice. The virtual currency definition varies among regulators and government entities. The Financial Action Tax Force, the Securities Exchange Commission (SEC) and the Internal Revenue Service (IRS) all define virtual currency as “a digital representation of value that can be digitally traded and functions as (1) a medium of exchange; and/or (2) a unit of account; and/or (3) a store of value.”
In this article, we use “cryptocurrency,” “virtual currency” and “digital assets” interchangeably. The IRS and the Commodity Futures Trading Commission (CFTC) tend to use the term “virtual currency or digital assets. The SEC generally uses the terms “digital assets,” “coins” or “tokens,” and the popular press almost always uses the term “cryptocurrency.” Popular cryptocurrencies include bitcoin (BTC), ether (ETH), and many thousands more, including cryptocurrencies that are not frequently traded.
WHAT ARE NFTS?
NFTs are unique digitized tokens that are recorded and transferred on a blockchain. An NFT can be a representation of something (a work of art, a photograph, a piece of music, a game or a collectible), or it can be an original creation that exists only in digital form. NFTs also include access to events and experiences available only to the NFT holder. NFTs are typically purchased and sold using the type of cryptocurrency or digital token (collectively referred to as tokens) used or accepted …….