Bitcoin Trust Investment Advisor Authority

Investment Advisor Authority and Key Control

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

What Traditional Directed Trusts Assume

A directed trust separates investment management from administrative duties. The administrative trustee handles recordkeeping, tax filings, and distributions. The bitcoin trust investment advisor makes investment decisions including whether to buy, sell, or hold Bitcoin. This separation works cleanly for traditional securities where the investment advisor directs trades and the trustee executes them through brokerage accounts.

Bitcoin custody complicates the separation between investment authority and administrative control. Investment decisions about Bitcoin require technical custody operations. The bitcoin trust investment advisor may have authority to decide Bitcoin allocation but lack the private keys needed to execute those decisions. Or the administrative trustee holds private keys but lacks authority to make decisions about when to use them.

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What Traditional Directed Trusts Assume

Directed trust arrangements assume investment and custody are separate functions. An investment advisor directs the purchase of one hundred shares of stock. They inform the trustee of the decision. The trustee executes the trade through the trust's brokerage account. The brokerage holds the stock. The trustee maintains records. The advisor retains no custody responsibility.

This separation relies on external infrastructure. Brokerage accounts provide custody. Trade execution happens through standard processes. The advisor's role ends at the decision. The trustee's role begins at execution. Clear boundaries exist between who decides what to buy and who actually holds the assets.

Bitcoin trust investment advisor arrangements attempt to apply the same separation to cryptocurrency. The advisor has authority over Bitcoin allocation decisions. They determine what percentage of trust assets to hold in Bitcoin. They decide when to buy or sell. The administrative trustee handles custody and execution. The trust document assigns roles based on traditional securities assumptions.

Reality creates gaps between assigned roles and practical capabilities. Bitcoin custody is not a passive administrative function like maintaining a brokerage account. It requires technical knowledge, active security management, and ongoing operational competence. The party with investment authority may not have custody capability. The party with custody responsibility may lack investment decision authority.

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Private Key Control Authority

Someone must control the private keys that allow moving Bitcoin. In directed trusts, determining who controls keys depends on whether key control is an investment function or an administrative function. The trust document may not specify because it was drafted before Bitcoin custody questions arose.

If the bitcoin trust investment advisor controls private keys, they can move Bitcoin whenever they decide to buy or sell. They have both decision authority and execution capability. But the administrative trustee loses meaningful custody responsibility because they cannot verify holdings or ensure Bitcoin is actually where the advisor claims it is. The trustee's administrative role becomes hollow when they lack custody access.

If the administrative trustee controls private keys, they have custody but the investment advisor must request execution of trades. The advisor directs a Bitcoin sale. The trustee must create and sign the transaction. This coordination introduces delay and dependencies. The advisor's investment authority is only as effective as the trustee's responsiveness and technical competence.

Some arrangements attempt split control through multisignature wallets. The advisor controls one key. The trustee controls another. Both must cooperate to move Bitcoin. This preserves separation of investment decision from custody control. But it creates new coordination challenges and potential deadlocks if the parties disagree about whether a transaction aligns with investment authority.

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Custody Method Selection Authority

Investment advisors make asset allocation decisions. Administrative trustees implement custody arrangements. With traditional securities, custody method is straightforward. Stocks held at a brokerage. Bonds at another institution. The advisor allocates. The trustee opens accounts and maintains custody relationships.

Bitcoin custody involves multiple method choices. Exchange custody, self-custody, multisignature arrangements, hardware wallets, cold storage, or custody service providers. Each method has different security characteristics, access patterns, fee structures, and operational requirements. Who decides which method the trust uses?

The bitcoin trust investment advisor might view custody method as an investment decision. Different custody methods create different risk profiles affecting investment returns. Exchange custody creates counterparty risk. Self-custody creates operational risk. The choice affects investment outcomes and therefore falls within investment authority.

Administrative trustees might view custody method as an administrative function. Trustees select custodians for traditional assets as part of their administrative duties. Selecting Bitcoin custody providers or methods fits this pattern. The advisor makes investment decisions within the chosen custody framework but does not direct how custody is implemented.

Trust documents rarely specify custody method selection authority for Bitcoin because documents were drafted without anticipating the question. Both parties assume their role includes this authority. Conflicts arise when the advisor wants self-custody for maximum control and the trustee wants institutional custody for liability protection.

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Transaction Execution Timing

Investment advisors expect timely execution of directed trades. An advisor directs selling stock and expects execution that day. Market prices affect investment returns. Execution delays cost the trust money. Traditional brokerage systems execute trades within seconds or minutes of direction.

Bitcoin trust investment advisor directions may face execution delays when the trustee controls private keys. The advisor directs selling Bitcoin. The trustee must create a transaction, sign it, and broadcast it to the network. If the trustee lacks immediate access to custody materials or needs to coordinate with other signers, execution is delayed. Bitcoin's price volatility makes delays costly.

Some trustees implement procedures requiring verification before executing advisor directions. They confirm the direction came from the authorized advisor. They verify it is within the advisor's scope of authority. They check that trust provisions allow the transaction. These prudent administrative steps introduce delays the advisor did not anticipate when directing immediate execution.

Custody methods also affect execution timing. Bitcoin held on an exchange can be traded immediately through the exchange interface. Bitcoin held in cold storage requires retrieving custody materials from offline storage. The advisor gives the same direction to sell Bitcoin, but execution time depends on custody method the trustee implemented. Investment results vary based on administrative decisions about custody implementation.

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Security Procedure Authority

Administrative trustees implement security procedures to protect trust assets. For traditional securities, security means fraud prevention, proper documentation, and safeguarding account access credentials. The trustee establishes these procedures as part of administrative duties without seeking investment advisor approval.

Bitcoin security procedures affect investment operations. The trustee implements a security procedure requiring two-person verification before any Bitcoin transaction. The bitcoin trust investment advisor directs a trade. Execution now requires coordinating two trustee representatives. The security procedure slows trade execution, potentially affecting investment returns. Does the advisor have authority to override security procedures that interfere with investment timing?

Some security procedures limit transaction frequency or size. The trustee implements a policy allowing only one Bitcoin transaction per week or limiting individual transactions to certain amounts. The advisor's investment strategy might require more frequent trading or larger transactions. The administrative security policy constrains investment implementation.

Conversely, inadequate security creates investment risk. The trustee implements minimal Bitcoin security procedures. Bitcoin is stolen due to lax security. The trust suffers investment losses. The bitcoin trust investment advisor had no authority over security implementation but faces investment return impacts from security failures. Authority and accountability misalign.

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Cost Allocation Between Roles

Trust expenses are allocated between investment management fees and administrative fees. Investment advisors charge fees for investment services. Trustees charge separate fees for administrative services. Bitcoin creates cost allocation questions when custody operations span both categories.

A trust uses institutional Bitcoin custody services. The custody service charges annual fees. Are these investment expenses or administrative expenses? The bitcoin trust investment advisor might argue custody is an administrative function and fees are the trustee's responsibility. The trustee argues the advisor directed using institutional custody and costs are investment-related.

Hardware wallets, security audits, and technical consultants create similar allocation questions. These costs support Bitcoin custody. Whether they are investment costs or administrative costs depends on whether custody is viewed as investment implementation or administrative safekeeping. The trust document does not specify because Bitcoin custody did not exist when the document was drafted.

Fee disputes affect total trust expenses and potentially compensation to both parties. If custody costs are allocated to investment expenses, the advisor's net compensation decreases. If allocated to administrative expenses, the trustee's net compensation decreases. Neither party wants to absorb costs they view as the other's responsibility. Bitcoin trust investment advisor arrangements create expense allocation conflicts that do not arise with traditional securities.

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Liability Exposure and Insurance

Investment advisors carry errors and omissions insurance covering investment decisions that lose money. Trustees carry fiduciary liability insurance covering administrative failures. Bitcoin custody failures create liability questions about which party bears responsibility and which insurance responds.

Bitcoin is lost because private keys are compromised. Was this an investment failure or an administrative failure? If the bitcoin trust investment advisor controlled the keys, the loss resulted from investment implementation and might trigger advisor liability. If the trustee controlled the keys, the loss was administrative and might trigger trustee liability. Both parties potentially face claims depending on how the loss is characterized.

Some losses result from joint failures. The advisor directed holding Bitcoin in a specific custody arrangement. The trustee implemented the arrangement inadequately. Bitcoin is stolen. Both parties contributed to the loss. Determining liability allocation requires analyzing what each party did wrong and whether those errors fall within their respective spheres of authority.

Insurance policies may exclude cryptocurrency-related claims or have sub-limits for digital asset losses. The advisor's policy excludes cryptocurrency custody claims. The trustee's policy covers cryptocurrency but with a low sublimit. Bitcoin losses exceed available insurance coverage. Liability exceeds insurance protection because both policies assumed traditional assets, not Bitcoin.

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Reporting and Verification Responsibilities

Administrative trustees report trust holdings to beneficiaries and tax authorities. Investment advisors report investment performance. Bitcoin creates reporting challenges that span both roles. Who is responsible for verifying Bitcoin exists and confirming reported holdings are accurate?

The trustee reports trust assets on tax returns. They list Bitcoin holdings. The bitcoin trust investment advisor controls the private keys and has not provided the trustee with access to verify holdings. The trustee reports based on the advisor's representations. If the advisor's information is wrong or fraudulent, the trustee filed inaccurate tax returns based on unverified information.

Investment performance reporting requires knowing Bitcoin quantities and values. The advisor reports investment returns. They need to know how much Bitcoin the trust holds. If the trustee controls custody and does not provide timely access or information, the advisor cannot accurately report performance. Performance reporting failure results from administrative custody practices.

Some directed trusts address verification through independent audits. An auditor verifies investment holdings annually. For traditional securities, this means confirming brokerage account statements. For Bitcoin, verification requires cryptographic proof of private key control or multisignature wallet composition. Who pays for specialized Bitcoin auditing? What happens if verification reveals discrepancies between advisor and trustee records?

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When One Party Cannot Fulfill Their Role

The bitcoin trust investment advisor has authority over Bitcoin allocation but lacks technical knowledge to implement Bitcoin custody. They direct Bitcoin purchases but cannot explain how to custody Bitcoin securely. The administrative trustee must implement custody without investment authority to make custody method decisions. Role separation breaks down when necessary expertise does not align with assigned authority.

Some trustees refuse to handle Bitcoin custody entirely. They inform the advisor that Bitcoin is outside their administrative capabilities. The advisor has authority to direct Bitcoin investments but no willing administrative party to implement custody. The trust cannot hold Bitcoin despite the advisor's authority to allocate to it because the administrative function cannot be performed.

Other trustees handle Bitcoin custody but implement methods that conflict with the advisor's investment strategy. The trustee uses only institutional custody services. The advisor's strategy requires self-custody for flexibility. The trustee cannot or will not implement the required custody method. Investment authority becomes meaningless when administrative implementation constrains exercise of that authority.

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Summary

Bitcoin trust investment advisor arrangements attempt to separate investment decisions from administrative custody using traditional directed trust frameworks. Bitcoin custody requires both investment decisions and technical operations that do not divide cleanly between advisor and trustee roles. Private key control, custody method selection, security procedures, and transaction execution all involve both investment and administrative elements.

Cost allocation, liability exposure, and reporting responsibilities create additional boundary questions. When one party lacks the capability to fulfill their assigned role, the separation framework breaks down entirely. Understanding these challenges explains why directed trust arrangements that work well for traditional securities encounter operational and liability problems when applied to Bitcoin.

This memo has described how bitcoin trust investment advisor authority boundaries become unclear when cryptocurrency custody requires combining investment decision-making with technical implementation. The external infrastructure that enables clean separation for traditional assets does not exist for Bitcoin, forcing both parties to navigate ambiguous authority over custody operations.

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System Context

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