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    Offshore Bitcoin Wallets

    EST. 1996

07February

Offshore Bitcoin Wallet For Holding Crypto: The Best Security and Privacy You Can Find

bitcoin wallet.jpeg

Bitcoin is back into the public mind as its continual resurgence has led to an increasing interest in not just individual but corporate buyers. However, technical vulnerabilities continue to be exploited, scams are appearing all over the place, individuals holding large quantities are being targeted, and hackers are preying on those with inadequate crypto security.

For the most part, due to the decentralised nature of cryptocurrencies, there is an every-man-for-themselves attitude when it comes to crypto security. Due to the lack of a centralised entity, we are our own banks; this means no-one other than ourselves can guarantee our holdings. If something goes wrong outside of a well-established exchange it’s unlikely you’ll see those funds again.

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Even with the best cybersecurity measures, the potential pitfalls of holding Bitcoin are still there. Although a lot of people are attracted to Bitcoin and other cryptocurrency investments for their anonymity, it is now easier than ever for certain parties to identify which wallet belongs to who.

This means you could be targeted by legal actions making your holdings a potential liability.

In order to maximise both security and privacy of your Bitcoin holdings, it is essential to understand what a Bitcoin wallet is, the different types available, how your crypto assets can get linked to your identity, and the solutions at hand that provide the most comprehensive asset protection.

What is a Bitcoin Wallet?

In its most basic definition a Bitcoin wallet is a device for holding and transacting Bitcoin, similar to the way that you store legal tender in your physical wallet. Bitcoin, however, is not physical, it operates on its own cryptographically secure network meaning you can’t keep your wallet in your pocket like you do with a physical wallet. Instead, these wallets have a unique way of cryptographically owning a wallet, making them inaccessible to other entities.

One common misconception about cryptocurrency wallets is that the assets are never actually stored on the wallet itself, they never leave the blockchain. Instead, they are recorded on the blockchain to be owned by a particular address — this is similar to owning shares in gold without physically having to hold the gold. Any kind of wallet is therefore a way of proving to the network that a particular address is owned by you. 

To maximise the security of your Bitcoin holdings, it is essential to understand a little bit about how the network identifies and communicates with a wallet:

  • Public key - Effectively the address or unique identifier of the wallet. Because Blockchains are completely transparent, anyone can view send money to or view the contents of any wallet given this identifier.
  • Private key - Can be thought of as the password which is needed when interacting with the wallet. If someone gets access to the private key while knowing the corresponding public key, they will have full control of that wallet. Similarly if the private key is lost there’s nothing that can be done to recover access to the wallet.

From these two points it’s easy to see that private key storage is the number one security factor while public key anonymity is the main factor for keeping your holdings anonymous.

What is an Offshore Bitcoin Wallet?

An offshore bitcoin wallet is a wallet that is not held in the same country where one is a resident. If the bitcoin wallet is held and owned by an offshore company in a country outside of where you live, the wallet is often called an offshore bitcoin wallet. The vehicle that is most often used for holding the wallet is an IBC or LLC which is used as a means to give asset protection and privacy which we will go into more later.

For more info on offshore companies and crypto go here.

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What are the Different Types of Bitcoin Wallet?

The first distinction one has to make with Bitcoin wallets is the notion of “hot” vs “cold”. This simply refers to whether the wallet requires connecting to the web (hot), or not (cold), in order to operate. Both types have different features and ways of working that come with various pros and cons that will suit different investor types.

Cold Wallets

The fact that cold storage wallets store the BTC (and other crypto-assets) offline easily makes them the most secure option on today’s market. Whenever a transaction is to be made, they require the wallet to be connected or restored which can be a bit of a hassle for some. That being said, they are perfect for long term holding (HODLing) where transactions don’t need to be made very regularly.

Paper Wallets

Paper wallets are the simplest form of cold wallet, they are quite simply the essential wallet data printed on a piece of paper. This can either be the unique seed phrase used to restore the wallet, or the public and private keys of the address itself.

Every time a transaction needs to be sent or received the paper wallet owner would simply enter their private key or seed phrase to activate (or restore, resp.) the wallet. Once online, the owner can transact their funds as they please. 

Pros

Cons

  • Can be generated without ever going online
  • No electrical parts to go wrong
  • Great for long term holding
  • If done correctly, provides complete anonymity
  • Need to be generated on a computer completely clean of any malware or keylogger
  • Fragile, Easy to forget and If found is immediately accessible
  • Can be cumbersome to transact with
  • Has no extra technological layers of protections such as PIN codes, mutli-sig, etc...

Hardware wallets 

The majority of cold bitcoin wallets will be hardware wallets. This is because these devices are specifically designed to do one thing and one thing only — hold bitcoin securely. Not only is the security top notch with extra layers of security such as on-device PIN verification but the user experience is made as intuitively as possible too.

The biggest thing to consider with hardware wallets is that your personal information is required at the time of purchase, which, like with the recent case of Ledger, can be compromised.

Pros

Cons

  • Can store multiple cryptocurrencies in one wallet
  • More convenient than paper wallets to use and interact with
  • Can interact with protocols while being offline (eg: for staking)
  • Requires connecting your device for every transaction
  • Customer data needs to be provided upon purchasing
  • Small and can be misplaced easily

Hot Wallets

Hot wallets are a type of software that can be downloaded or installed on either a desktop computer or a mobile device. While being connected to the internet poses a greater chance of risk when set-up incorrectly, it often makes them easier to restore in the event of device loss. Making regular transactions and managing funds is easier too. Many users will split their BTC into multiple hot wallets (provided they can store the private keys safely) to decrease the impact of one being compromised.

Bitcoin Hot wallets have come a long way since their inception and the layers of privacy and security keep increasing. There is the option between full-node and light wallets, where the former means the wallet stores an entire copy of the blockchain providing its own validation on every transaction and not relying on any third-party data source, thus further increasing the security. The latter, light wallets, rely on a third party server to validate transactions as they do not know the state of the blockchain, this makes them quicker to use.

Pros

Cons

  • Improved user experience
  • Are generally free
  • Can split funds into multiple wallets
  • Easier transactions, no need for anything external
  • Can be restored anywhere given the seed phrase
  • It is possible if not careful to download malicious copycat wallets
  • If your device gets hacked, so could your wallet(s)

 

CeFi and custodian services wallets

Another option to be aware of is Centralised Finance (CeFi) “wallets” and custodian services. Although functionally not the same, they do share the key characteristic of managing your funds for you. The former will generally provide returns on keeping your assets inside your wallet, similar to a bank; while the latter is a paid service aimed at managing large amounts and will likely provide some form of asset insurance. In certain countries, governments make it mandatory to declare assets above a certain limit and some, like the US, require you to host them with a dedicated custodian service. 

There is a popular saying however in the cryptocurrency community though which is “not your keys, not your crypto”. This basically just means that if you aren't in control of the private key, it’s not really your crypto. The entrusted third-party could develop restrictions or come under some lawsuit which would hinder your ability to withdraw from their service. This has been known to happen to numerous well reputed crypto services. 

Also, being a separate business with their own legal requirements, full KYC is required and the assets are stored in your name.

Pros

Cons

  • Provides a third-party layer which offers extra services on your assets
  • Some financial incentives can exist for using them
  • Full KYC required
  • Not your keys, not your crypto — problems could arise on their end
  • Possible delays when withdrawing

Multisig

Lastly, we should mention one of the most secure forms of bitcoin storage — the multisignature wallet. Mutlisig wallets have multiple private keys (eg: one for each stakeholder) where in order to transact using the wallet a predetermined number of the partitioned private keys have to authorise the transaction. A single bitcoin wallet is difficult enough to compromise, linking multiple wallets together makes the contents of a multisig wallet nigh-unbreakable. 

These are normally bespoke solutions and are normally used by exchanges and other institutional investors dealing with large asset holdings spread across numerous stakeholders. It is also now possible for crypto-savvy individuals to set them up themselves.

Pros

Cons

  • Share your security with other stakeholders
  • Excellent for large holdings
  • Can work with either hot or cold wallets
  • Can be difficult to set up
  • Not ideal for frequent accessing
  • Requires even more private keys to store securely
  • Requires complete trust in each keyholder

Maximising Privacy

Bitcoin gives implicit anonymity, a feature which draws people to it, but this is far from saying that Bitcoin is untraceable. One must be aware that blockchains are transparent and it has become increasingly easy to track the movements of Bitcoin from one wallet to another, even if you don’t know who that wallet belongs to. If no-one knows that a particular wallet belongs to you, you’re essentially anonymous, right..? 

Not necessarily. Any transaction that requires KYC is the link between an investor’s identity and his/her holdings. With governments ramping up requirements for exchanges to report every transaction made by all clients, especially in the US, it is difficult to decouple your identity with that of your storage solutions. Once the wallet ID of the fiat on-ramp is known, it is easy to then track all subsequent transactions that have occurred. This can effectively become the opposite of anonymity if someone gets access to the point of entry.

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How Can I Buy Bitcoin Securely?

Other alternatives exist to acquire Bitcoin without KYC, such as a Peer-to-peer purchase (buying it through a marketplace, comparable to eBay, or in person), or Decentralised Exchanges with card payments such as MoonPay. These are viable options but come with downsides such as negotiable/ less-favourable prices, human error, less liquidity and potential trade compromise.

These options can also come under scrutiny from legal bodies as they could be seen as not declaring assets. Luckily, a much better option exists, one that is completely law-abiding, which provides much more privacy, and, if done correctly, protection — buying and holding your Bitcoin offshore. 

Managing and Securing an Offshore Bitcoin Wallet

While many countries are developing a hostile approach to cryptocurrencies, others are embracing it by developing favourable legal regulations for their holding, purchasing and taxing. Similar to an offshore bank account, incorporating a non-resident LLC to manage your Bitcoin holdings will offer greater asset protection from a legal standpoint.

When it comes to the privacy flaw that is the exchange KYC-Wallet link we spoke of earlier, this can also be drastically improved due to the confidentiality and discretion that comes with offshore companies. 

One of the best approaches is to form an LLC in one of our favorable crypto countries whereby the bitcoin wallet is placed in an offshore LLC. The advantage of having an offshore LLC is that it gives you a layer of asset protection and privacy that just cant be found if you incorporate a domestic LLC.

Differences between Onshore Bitcoin Wallet and Offshore Bitcoin Wallet

The essential difference between an onshore and offshore bitcoin wallet is the residence of the individual or the corporate entity that owns the wallet. This means that if you are a legal person or a corporate entity with a domestic corporate structure in the form of a corporation or LLC and both you and the entity exist in the same jurisdiction then it can be considered an onshore company and therefore an onshore wallet.

Even though there may not be any physical existence of a bitcoin wallet, the ownership of the digital assets depend upon the physical location of the entity who is legally the beneficial owner.

An offshore bitcoin wallet is when the individual who lives and resides in one country holds the wallet in a legal structure in a country outside where he/she lives. Many countries around the world allow for non-residents to own and form a company. An offshore jurisdiction, therefore, is simply a country that allows nonresidents the ability to have a corporate structure in the country, whereby the structure is free from local taxation because it does not engage in local business or transactions.

Offshore Bitcoin Wallet & Corporate Legal Structuring

Offshore jurisdictions do not recognize foreign court orders and require suits to be filed within the country where the account is located. Similarly, by having a corporate structure hold the wallet you are removing your name as an individual from direct association.

Even though you still own it for all intents and purposes only the government would know (if it has a member of the CRS) and the public would only see the corporate structure as retaining ownership. Nominee services can also be used, and as a licensed attorney under client privacy, it is under no obligation to reveal the beneficial owner.

Similarly, the sharing of information is done through CRS, FATCA and through any Tax Information Exchange Agreement and so if you reside in a country that is not a member then the offshore jurisdiction is under no obligation to report your holdings. Your holdings, however, must be reported as per your nationality and residency requirements.

Offshore Structuring: How to Structure your Offshore Bitcoin Wallet

  1. Incorporate an LLC in a foreign jurisdiction
  2. For greater security, asset protection and for trading crypto a second company should be opened
  3. A second company is formed that becomes the owner of the first this enables one company to hold the assets and the other to trade.
  4. Company A is allowed to hold the assets offshore while the second engages in the trading whereby any assets that are needed to be brought onshore are done so by the owner who can bill the company and invoice the company as an independent contractor.
  5. Only the income that is brought within the country is taxable (however Americans will not benefit from this arrangement due to their FATCA and CFC laws)

Once the Bitcoin has been acquired with these privacy considerations, it’s then up to you to choose and implement a storage solution out of the options mentioned above or find a suitable custodian service. This should be tailored to one’s requirements and capabilities, something which we can help you with to achieve the greatest privacy and asset protection available today.

For More information on Offshore Crypto

For more info on exchanges:

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There are no longer one-size-fits-all offshore solutions.
 
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Disclaimer: Information on this site does not constitute legal or tax advice.
Though we try and keep information up-to-date, company and tax laws change.
Please seek a qualified representative for advice.

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