Why Trusts? Flexible Legal Buckets That Can Own and Manage Anything
One of our community members asked us why we use trusts and fiduciaries for legal ownership and management of tokenized assets. That’s a reasonable question; one of the ideals of decentralized systems is to remove human intermediaries. This post explains how trusts are the most reliable vehicle for asset management within the current legal framework, and how we’re taking a practical, hybrid approach to establishing ownership of tokenized assets.
Why Asset Tokenization Hasn’t Been Solved Until Now
As we’ve written before:
If you want to make tokens that give token-holders meaningful ownership of a real-world asset, we need a way to establish ownership that’s recognized by both blockchains and legal-financial authorities. Otherwise, you can’t reliably redeem the asset’s tokens for the underlying asset, and your tokens aren’t worth anything.
A Practical, Hybrid Approach to Asset Management That Works Today
Someday, governments might enable digital signatures for smart contracts or DAOs to directly own bank accounts or physical property. That would be more purely decentralized. If/when that happens, we’ll celebrate a victory for the crypto industry, and start building tools to help people make use of that new regulation.
But today, if a person or company wants to open a bank account or own a title deed, that registration requires a human representative. So until banks allow smart contract signatures, we’re building on the best-known, frequently-tested system for ownership-by-proxy: trust accounts.
Trust accounts aren’t the endgame for decentralized money and tokenized asset management, but the trust industry already works extremely well for managing money and assets, and we can start using it today.
Given the strong benefits of liquidity and fractional ownership, even a medium-term solution like this can enable new business opportunities and huge, legitimate growth for the crypto economy.
Flexible Legal Buckets That Can Own and Manage Anything
Living trusts were first established by English common law in the 13th century, when landowners would leave to fight in wars and needed a way to temporarily transfer ownership and management of their estates until their return.
Today, most high-net-worth individuals already have trust accounts to manage various assets. When I first started researching legal ownership vehicles, I was surprised at how flexible and widely used trusts are: in addition to estate planning, they’re used by companies and nonprofits to hold billions of dollars of oil and gas, real estate, and technology prize funds. Trusts can hold literally any asset: you could make a trust to contain 100 houses, your pet llama, a wheelbarrow of gold, and your online stock portfolio.
Advantages of Trusts
- Remains a private document
- Retains maximum control over property (reduces or eliminates estate taxes)
- Avoids probate court
- Do not require government registration or annual fees
- Offers freedom of ownership and management. (Not just shares; the beneficial owners can be specified through any method, and that definition can be dynamically updated.)
- Protected from lawsuits against the original creator
- Taxes for ownership can be equally and straightforwardly distributed among beneficiaries
An Incentive System That Already Works
A TrustToken legal contract is overseen by a trustee: a legally bound and regularly audited asset manager.
The trustee is chosen by you, the client, from an open, distributed marketplace of freely-competing professional fiduciaries (instead of centralizing asset management to a private, unaudited startup, the way that LAToken or Bankex do).
The US financial law system and modern fiduciary industry have strong incentives to maintain high fiduciary trustworthiness. These include the credentialing process to become a professional fiduciary, plus the threat of imprisonment, charges for damages, and loss of career. Professional fiduciaries in the United States are currently responsible for managing hundreds of billions of dollars of global assets. They work in trust companies, which are heavily regulated and routinely audited by their state.
Trusted By Token-Holders, Full Stop
Someday, governments may allow for direct legal representation by digital entities, eliminating the need for a human intermediary. Until then, we can interface with trusts, a part of modern legal infrastructure that already offers solid legal representation. Since blockchains need to connect to some part of the legal-financial enforcement system, trust law is the most flexible and reliable for asset management.
We don’t want to just give assets to some private company’s “custodians” and hope that they give it back. If we want to see the full potential of real-world asset tokenization, then we do everything possible within current legal framework to ensure protection for the token holders. That’s why TrustToken has spent the last year developing a new legal framework in trust law, to bring a new standard of trust to the tokenization industry.
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DISCLAIMER: In consultation with legal counsel, TrustToken reserves the right to change the distribution schedule and/or impose additional restrictions on transfer and resale if necessary to comply with securities laws. You should also review our most recent FAQs and PPM for a more complete discussion of these factors and other risks, particularly under the PPM heading “Risk Factors.”
