Fiduciary Duty & Digital Assets: The "Prudent Person" Standard
The Executive Verdict
1. The Core Definition: Is Bitcoin a Violation of Duty?
Historically, fiduciaries used "Legal Lists" (Bonds only). The UPIA modernized this. Fiduciaries must balance Cash Risk (Inflation) vs. Crypto Risk (Volatility). Trading short-term volatility for long-term purchasing power preservation is defensible.
A "Risk See-Saw." Left: "Cash (Inflation Risk)." Right: "Bitcoin (Volatility Risk)." Fulcrum: "Prudent Allocation (1-5%)." The scale is perfectly balanced.
2. The Legal Framework: The "Prudent Person" Pillars
3. Digital Asset Volatility vs. Fiduciary Risk Mitigation
Volatility is only toxic if it forces a fire sale. If the company has 12-24 months of cash runway, short-term drops are irrelevant to solvency. The "Zero" Write-Down Test: If asset goes to zero, do we miss payroll?
| Allocation % | Fiduciary Risk Level | Justification |
|---|---|---|
| 0.5% - 2% | Low (Defensible) | "R&D Pilot" or "Asymmetric Hedge." Minimal solvency impact. |
| 3% - 5% | Medium (Scrutiny) | "Strategic Reserve." Requires strong inflation thesis. |
| 5% - 10% | High (Aggressive) | "Conviction Bet." Hard to defend without shareholder buy-in. |
| > 10% | Critical (Liability) | Resembles an investment fund. Pierces Business Judgment Rule. |
4. Custodial Risk: The Graveyard of Fiduciaries
"Not Your Keys" is risky legal advice for Boards. Self-Custody = Key Person Risk. The Prudent Path: Use Qualified Custodians (Coinbase Prime, Fidelity) with Specie Insurance and Segregated Assets.
A decision tree: "Who holds the Keys?" Branch A: CEO (Red Warning: Fiduciary Failure). Branch B: Qualified Custodian (Green Check: Institutional Standard).
5. The Governance Artifact: Investment Policy Statement (IPS)
You cannot buy crypto without updating the IPS. Essential Clauses: 1. Permitted Assets (Market Cap >$10B, 5yr track record). 2. Stop-Loss/Rebalancing (Sell if >5% of portfolio). 3. Liquidity Buffer (Maintain 6 months cash first).
6. Implementation: The Board Resolution
Sample Language: "RESOLVED, that the Corporation is authorized to allocate... not to exceed [X]%... for primary purpose of diversifying treasury risk... utilizing a Qualified Custodian meeting SOC 2 Type II standards."
7. Summary Checklist: The "Prudence" Test
1. Solvency Check (12mo runway?). 2. Sizing Check (<5%?). 3. Custody Check (Qualified Custodian?). 4. Policy Check (IPS Amended?). 5. Insurance Check (D&O inclusions?).
F.A.Q // Logical Clarification
Can shareholders sue if price drops 50%?
"Yes, but they lose if Business Judgment Rule applies (Process > Outcome)."
Does D&O Insurance cover crypto?
"Not automatically. Requires specific "Digital Asset Questionnaire" disclosure."
Why not just buy an ETF?
"ETFs are cleaner for fiduciary simplicity. Holding the asset is for operational utility or fee avoidance. Document the choice."
Module ActionsCW-MA-2026
Institutional Context
"This module has been cross-referenced with Legal & Regulatory / Corporate Governance standards for maximum operational reliability."