Bitcoin SIMPLE IRA Custody Obligation Gaps

SIMPLE IRA Custody Gaps and Asset Verification

This memo is published by CustodyStress, an independent Bitcoin custody stress test that produces reference documents for individuals, families, and professionals.

The Custodian Duty Framework

SIMPLE IRA plans allow small employers to offer retirement benefits. The acronym stands for Savings Incentive Match Plan for Employees. These plans require a custodian to hold and administer plan assets. Bitcoin SIMPLE IRA custody creates gaps between custodian obligations defined by regulation and custodian capability to fulfill those obligations for cryptocurrency assets.

SIMPLE IRA regulations were written assuming traditional assets: stocks, bonds, mutual funds. Custodians verify these assets through third-party systems. Bitcoin exists outside these systems. The custodian faces duties defined for traditional assets while holding an asset that does not fit traditional custody models.

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The Custodian Duty Framework

SIMPLE IRA custodians must provide accurate account statements. They must maintain complete records. They must ensure only permitted transactions occur. These duties assume the custodian can observe and verify asset status directly. Traditional securities sit in the custodian's brokerage systems. The custodian sees positions, receives corporate actions, and tracks transactions automatically.

Bitcoin SIMPLE IRA custody operates differently. The bitcoin exists on a blockchain the custodian does not control. Verification requires checking addresses the custodian does not necessarily have infrastructure to monitor. Corporate actions do not exist in traditional sense. The regulatory framework defining custodian duties and the technical reality of bitcoin custody misalign.

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The Asset Verification Problem

Custodians must verify assets exist and belong to the account. For stocks, the custodian checks with the transfer agent or depository. Verification happens through established channels. Bitcoin SIMPLE IRA custody requires verifying bitcoin exists at specific addresses. The custodian must check blockchain balances. Many custodians lack systems for this verification. They must either build technical capability or outsource to third parties, introducing dependencies the SIMPLE IRA framework did not anticipate.

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The Contribution Limit Enforcement

SIMPLE IRAs have contribution limits. Employees can contribute up to specific dollar amounts. Employers must match certain percentages. Custodians help enforce these limits by rejecting contributions that would exceed them. This enforcement assumes contributions arrive as cash deposits the custodian controls.

Bitcoin SIMPLE IRA custody complicates limit enforcement. Participants might contribute bitcoin directly. What dollar value applies for limit purposes? The value at contribution? The value when the bitcoin was acquired? If bitcoin appreciates between acquisition and contribution, does the appreciation count against limits? The custodian must determine contribution value in real-time to enforce limits, requiring pricing data and valuation methods the SIMPLE framework did not define for cryptocurrency.

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The Prohibited Transaction Monitoring

SIMPLE IRAs prohibit certain transactions. Participants cannot borrow from their accounts. They cannot engage in self-dealing. Custodians monitor for prohibited transactions as part of their duty. Traditional asset monitoring relies on the custodian being the gatekeeper for all transactions. Nothing happens without custodian involvement.

Bitcoin SIMPLE IRA custody creates monitoring challenges. If the IRA participant knows private keys, they could potentially move bitcoin without custodian knowledge. The custodian's monitoring depends on technical custody architecture actually preventing participant access. Many bitcoin custody solutions involve key sharing for redundancy. These arrangements might allow participant transactions the custodian cannot detect or prevent. The custodian's duty to monitor exceeds their technical capability to observe.

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The Statement Accuracy Requirement

Custodians must provide participants with accurate account statements. Statements show contributions, earnings, distributions, and current value. Traditional assets make this straightforward. The custodian's systems track everything automatically. Bitcoin SIMPLE IRA custody requires the custodian to determine bitcoin value as of statement date. This valuation uses exchange pricing that varies across exchanges and timestamps. The custodian must select pricing sources and methodologies the SIMPLE framework did not specify.

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The Fiduciary Liability Exposure

Custodians face fiduciary liability for failing to meet custody duties. If assets are lost due to custodian negligence, the custodian bears liability. Traditional asset custody has established standards. Everyone understands what reasonable custody looks like for stocks. Bitcoin SIMPLE IRA custody lacks these standards. What security measures are adequate? What key management practices are prudent? The custodian makes judgment calls without clear regulatory guidance about what standard of care applies to cryptocurrency custody in SIMPLE IRA context.

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The Required Minimum Distribution Challenge

SIMPLE IRAs convert to traditional IRAs after two years. Traditional IRAs require minimum distributions starting at age 73. These distributions are calculated based on account value. Custodians facilitate required minimum distributions by liquidating assets and distributing cash. Bitcoin SIMPLE IRA custody creates liquidation questions. Must the custodian maintain ability to liquidate bitcoin positions to satisfy distribution requirements? Many bitcoin custody arrangements prioritize security over liquidity. These arrangements might not enable the rapid liquidation required minimum distributions sometimes demand.

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The Rollover Verification Problem

Participants can roll SIMPLE IRA assets to other retirement accounts after two years. Rollovers require the custodian to transfer assets accurately. Traditional securities transfer through established systems. Bitcoin SIMPLE IRA custody rollovers require transferring bitcoin to addresses provided by receiving custodians. The sending custodian must verify the receiving address is actually controlled by the receiving custodian and not an attacker spoofing communications. This verification requires coordination and authentication mechanisms the retirement account transfer system did not anticipate needing.

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The Employer Match Complexity

SIMPLE IRA employers must match employee contributions up to three percent of compensation. Matching happens in the same plan. If employees contribute bitcoin, must employer matches be in bitcoin? In cash? The regulations do not address cryptocurrency specifically. Bitcoin SIMPLE IRA custody creates operational questions about form of match when contributions are non-cash assets.

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The Custody Model Ambiguity

Traditional SIMPLE IRA custodians actually hold assets. The custodian is a bank or brokerage with possession of securities. Bitcoin custody can be structured many ways. The custodian might hold keys directly. They might use multi-party custody with third parties. They might operate multisignature arrangements. Bitcoin SIMPLE IRA custody lacks clarity about which arrangements satisfy custodian duty when the custodian's actual control varies across different technical architectures.

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The Valuation Dispute Risk

Participants might dispute valuations on statements. They claim their bitcoin was worth more than the custodian reported. The custodian selected one exchange price. The participant argues a different exchange showed higher prices. Traditional asset valuation uses clearinghouse or exchange prices everyone accepts. Bitcoin SIMPLE IRA custody lacks authoritative pricing sources. Custodians face potential disputes about whether their selected valuation methods are reasonable and accurate.

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The Audit Complication

SIMPLE IRA plans can be audited. Auditors verify custodian records match reality. For traditional assets, auditors confirm holdings with transfer agents and exchanges. Bitcoin SIMPLE IRA custody audits require different verification approaches. Auditors must verify bitcoin exists at claimed addresses and confirm the custodian controls those addresses. This requires technical procedures auditors might not have standardized. The audit becomes more complex and potentially more expensive than audits of traditional SIMPLE IRA assets.

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The Insurance Gap

Traditional custodians carry insurance covering various losses. FDIC insurance covers bank deposits. SIPC insurance covers securities custodied by brokerages. Bitcoin SIMPLE IRA custody has limited insurance options. Some custodians self-insure. Others obtain private insurance with exclusions and limits. Participants expecting traditional custody insurance protections discover bitcoin held in their SIMPLE IRA has different insurance characteristics. The custodian's duty to protect assets meets an insurance landscape that does not fully cover cryptocurrency like it covers traditional retirement assets.

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The Technical Failure Liability

Bitcoin custody involves technical systems. Systems fail. Keys get lost. Software has bugs. Hardware malfunctions. When technical failure causes loss in a SIMPLE IRA context, liability questions arise that regulations did not anticipate. Is the custodian liable for all technical failures? Only negligent failures? What standard of technical competence do custodians need? Bitcoin SIMPLE IRA custody creates liability exposures traditional custody avoided through institutional safeguards.

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Outcome

Bitcoin SIMPLE IRA custody creates gaps between custodian obligations defined for traditional assets and custodian capability to fulfill those obligations for cryptocurrency. Custodians must verify asset existence through blockchain checking rather than institutional channels. They must enforce contribution limits when bitcoin contributions require real-time valuation. They must monitor for prohibited transactions when technical architecture might not prevent participant access.

Statement accuracy requires selecting pricing sources regulations did not specify. Fiduciary liability exists without clear standards for cryptocurrency custody adequacy. Required minimum distributions need liquidation capability that security-focused custody might not provide. Rollovers require address verification systems the transfer infrastructure did not anticipate. Employer matches raise questions about form when contributions are non-cash.

Understanding bitcoin SIMPLE IRA custody challenges reveals why traditional custodians often decline to hold cryptocurrency in retirement accounts. The regulatory framework assumes asset characteristics bitcoin does not have. Custodian duties defined for institutional securities become difficult to fulfill for cryptographic assets existing outside traditional financial infrastructure.

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