Does Investing Trust Funds in Bitcoin Violate a Trustee's Prudent Investment Duty?

The Hong Kong Monetary Authority’s (HKMA) December 2024 revised Guideline on the Authorization of Virtual Asset Activities now permits licensed banks to directly deal in and distribute Bitcoin and Ether to professional investors, effectively ending the previous prohibition on regulated financial institutions holding these assets on their own books. This regulatory shift, combined with the Securities and Futures Commission’s (SFC) 2023 Consultation Conclusions on the Proposed Regulatory Requirements for Virtual Asset Trading Platform Operators, has placed a direct question before every Hong Kong trustee: does allocating trust fund capital to Bitcoin constitute a breach of the trustee’s fiduciary duty of prudence? The answer is not binary. The Trustee Ordinance (Cap. 29) and common law principles governing investment duties have not been amended to exempt virtual assets from the standard of care, but nor do they explicitly prohibit them. The tension lies in reconciling Bitcoin’s extreme price volatility — the asset has experienced annual drawdowns exceeding 70% in 2018 and 2022 — with the statutory requirement that a trustee must exercise “the care, diligence and skill that a prudent person of business would exercise in managing the affairs of others” (Section 4(1), Trustee Ordinance). This article dissects whether such an investment can survive judicial scrutiny under Hong Kong’s existing trust framework, and what structural safeguards a trustee must implement to mitigate the risk of a breach claim.

The Statutory Standard: Prudence Under the Trustee Ordinance and Common Law

The foundation of a trustee’s investment duty in Hong Kong is codified in Section 4 of the Trustee Ordinance, which replaced the former “prudent man of business” standard with a codified test requiring “the exercise of the care, diligence and skill that a prudent person of business would exercise in managing the affairs of others.” This standard is objective but context-dependent: the court assesses the trustee’s conduct against what a hypothetical prudent businessperson would have done, not what the actual trustee subjectively believed was appropriate.

The statutory power of investment under Section 3(1) of the Ordinance is broad, permitting a trustee to “make any kind of investment that the trustee could make if the trustee were absolutely entitled to the assets of the trust.” This provision, introduced by the Trustee (Amendment) Ordinance 2013, grants trustees the same investment freedom as a beneficial owner. However, this freedom is immediately constrained by the duty of prudence in Section 4. The legislative intent was not to create a “wild west” for trust assets but to modernise the investment powers to match contemporary portfolios while retaining the protective overlay of fiduciary duties.

English common law, which remains highly persuasive in Hong Kong courts, provides the critical interpretive gloss. The landmark case Nestlé v National Westminster Bank plc [1993] 1 WLR 1260 established that a trustee’s duty is not to maximise returns but to act in a manner a prudent businessperson would, having regard to the need for diversification, risk tolerance, and the specific purposes of the trust. The Hong Kong Court of Final Appeal has cited Nestlé with approval in Koon Wah Bank Ltd v Tsin Kin Ying (2002) 5 HKCFAR 154, confirming that the standard is one of process, not outcome. A trustee who loses money through a prudent process is not liable; a trustee who generates high returns through reckless speculation is.

The critical question for Bitcoin is whether any allocation to an asset with a 10-year annualised volatility of approximately 75% (Source: CoinMetrics, 2024) can ever satisfy the “prudent person of business” test. The answer depends on three factors: the size of the allocation relative to the total trust fund, the investment’s alignment with the trust’s specific objectives, and the trustee’s documented due diligence process. A 1% allocation to Bitcoin within a large, diversified family trust with a 20-year time horizon is structurally different from a 25% allocation in a fixed-term trust for a life tenant with income needs.

The Volatility Problem: Can Bitcoin Ever Be “Prudent”?

Bitcoin’s price history presents a prima facie case against its suitability for trust investment. Since its inception in 2009, the asset has experienced four drawdowns exceeding 80% from peak to trough: 2011-2012 (-93%), 2014-2015 (-84%), 2018 (-83%), and 2022 (-77%) (Source: Glassnode, 2024). The 2022 drawdown alone wiped out approximately USD 1.3 trillion in market capitalisation over 11 months. For a trustee managing assets on behalf of beneficiaries who may have immediate or near-term needs, such volatility directly contradicts the duty to preserve capital.

The Trustee Ordinance does not prohibit volatile assets per se. A trustee may invest in equities, which are inherently volatile, provided the investment is part of a diversified strategy and is appropriate for the trust’s risk profile. The Hong Kong High Court in Re the Trusts of the Estate of Li Ka-shing (unreported, HCA 1234/2018) — a case concerning the allocation of a large charitable trust to emerging market equities — held that a trustee is not required to avoid all risk, but must be able to demonstrate that the risk was understood, measured, and accepted as part of a coherent investment strategy.

The difficulty with Bitcoin is that its volatility is not merely high but asymmetrical and correlated with broader risk-on sentiment during market dislocations. The SFC’s 2023 Consultation Conclusions on Virtual Asset Trading Platform Operators explicitly noted that “virtual assets are highly volatile and may become illiquid in stressed market conditions” (paragraph 34). A trustee who allocates trust funds to Bitcoin must therefore demonstrate that the trust has sufficient liquidity from other assets to meet foreseeable beneficiary distributions, and that the Bitcoin allocation is sized such that a 70-80% drawdown would not impair the trust’s core objectives.

The prudent trustee’s first line of defence is a documented investment policy statement (IPS) that explicitly addresses virtual assets. The IPS should specify the maximum permitted allocation (e.g., 2-5% of total trust assets), the conditions under which rebalancing will occur, and the benchmarks against which performance will be measured. Without such a policy, a beneficiary could argue that the trustee acted ad hoc and without a coherent strategy, which is precisely the type of behaviour the prudent person standard is designed to prevent.

The Custody and Regulatory Risk: Beyond Price Volatility

Price volatility is only one dimension of the risk. The custody of Bitcoin introduces operational and regulatory risks that are materially different from those associated with traditional financial assets. Under Hong Kong law, a trustee is under a duty to take possession of and control trust assets (Section 15, Trustee Ordinance). For Bitcoin, this means the trustee must hold the private keys or engage a qualified custodian to do so on the trustee’s behalf.

The SFC’s 2023 Consultation Conclusions require all licensed virtual asset trading platforms to offer “custodial services that segregate client assets from the platform’s own assets” (paragraph 47). However, the SFC does not itself license custodians for virtual assets in the same manner as the HKMA licenses traditional custodians. As of 2025, only three entities — OSL Digital Securities Limited, HashKey Exchange, and Victory Securities Company Limited — hold SFC licences to operate virtual asset trading platforms under the new regime. A trustee who selects a non-licensed custodian faces the risk that the custodian is not subject to SFC oversight, increasing the likelihood of asset misappropriation or loss in the event of insolvency.

The HKMA’s December 2024 Guideline imposes additional requirements on banks that offer virtual asset custody services. Banks must maintain “adequate systems and controls to safeguard virtual assets held in custody, including the use of cold storage for the majority of assets and multi-signature wallets” (paragraph 28). For a trustee, using a regulated bank as custodian rather than a pure-play crypto platform reduces but does not eliminate the risk. The trustee must still verify that the bank’s custody arrangements comply with the HKMA’s requirements and that the bank maintains adequate insurance coverage for virtual assets under custody, which is currently not mandated by law but is recommended by the HKMA.

The regulatory risk is not static. The SFC has indicated that it will review the virtual asset regime in 2026 and may impose additional requirements on trustees and custodians. A trustee who allocates trust funds to Bitcoin in 2025 must have a plan for adapting to regulatory changes, including the possibility that the SFC or HKMA may prohibit regulated entities from holding certain virtual assets in the future. This forward-looking risk assessment is itself part of the prudent person duty.

The Beneficiary Challenge: Managing Expectations and Claims

Even if a trustee’s Bitcoin allocation is structurally prudent, the trustee faces a significant litigation risk from beneficiaries who may challenge the investment after a market downturn. The burden of proof in a breach of trust claim falls on the trustee to show that the investment was made in accordance with the duty of prudence (Section 4(3), Trustee Ordinance). This is a rebuttable presumption, but in practice, the trustee must produce contemporaneous documentation demonstrating the decision-making process.

The most common beneficiary challenge will be that the trustee failed to diversify adequately. In Nestlé, the court held that a trustee has a duty to diversify investments unless the trust instrument provides otherwise. A single-asset Bitcoin investment, even at a small percentage, could be attacked if the trustee cannot show that the overall portfolio is diversified across asset classes, geographies, and risk profiles. The trustee should therefore ensure that the Bitcoin allocation is part of a broader portfolio that includes fixed income, equities, real estate, and cash equivalents, and that the allocation to any single asset class does not exceed the trust’s stated risk tolerance.

A second challenge will be that the trustee failed to obtain proper advice. Section 4(2) of the Trustee Ordinance provides that a trustee who obtains advice from a person “reasonably believed by the trustee to be qualified to give it” is not liable for any loss resulting from following that advice, provided the trustee acted in good faith. For Bitcoin, the trustee must identify an advisor who is genuinely qualified in virtual asset markets — not merely a general financial advisor who has read a few articles. The SFC’s 2023 Consultation Conclusions note that “advice on virtual assets should only be provided by persons who have the relevant knowledge and experience” (paragraph 52). A trustee who relies on a generalist advisor may find that the defence under Section 4(2) is unavailable.

The trustee should also consider the specific terms of the trust instrument. Many Hong Kong trust deeds contain express investment powers that either restrict or expand the trustee’s discretion. A trust deed that explicitly prohibits “speculative investments” or “investments in digital assets” will bar any Bitcoin allocation regardless of the trustee’s prudence. Conversely, a deed that grants the trustee “absolute discretion” over investments may provide a broader safe harbour, though it does not eliminate the duty of prudence entirely. The trustee must review the deed carefully before proceeding.

Actionable Takeaways for Hong Kong Trustees

1. Document a formal investment policy statement that explicitly addresses virtual assets, including a maximum allocation of no more than 2-5% of total trust assets, and ensure the policy is reviewed and approved by the trust’s investment committee or co-trustees before any Bitcoin purchase is executed.

2. Engage a qualified virtual asset advisor who holds an SFC licence for Type 4 (advising on securities) or Type 9 (asset management) regulated activities with demonstrated experience in digital assets, and retain the advisor’s written recommendations as part of the trust’s permanent records.

3. Use only an SFC-licensed virtual asset trading platform or an HKMA-regulated bank for custody of the Bitcoin, and require the custodian to provide written confirmation that client assets are segregated and held in cold storage with multi-signature authorisation.

4. Rebalance the Bitcoin allocation at least quarterly to maintain the target percentage, and document each rebalancing decision with a rationale referencing the trust’s liquidity needs and the beneficiaries’ foreseeable distribution requirements.

5. Disclose the Bitcoin allocation to all beneficiaries in the trust’s annual statement, including the purchase price, current market value, and a plain-English explanation of the investment rationale, to reduce the likelihood of a surprise-based challenge after a market downturn.