Smart contracts could hold property with Instant Blockchain Token Trusts
When you see the word ‘trust’ in relation to blockchain, it’s usually as part of the word ‘trustless’, where you don’t need to trust a intermediary or third party as a consequence of leveraging a blockchain and smart contracts.
Today, it is hard to have a trustless smart contract hold property as jurisdictions do not recognise the ability of a smart contract to hold property. I think the ‘trust’ legal concept can help enable smart contracts to hold property — through the concept of a token trust, where the trust exists for the benefit of token holders.
(I’m not a lawyer — please consult legal & tax counsel before you attempt anything contained in this blogpost and pick your jurisdiction well)
tld;r What could token trusts be used for?
- Token trusts could hold trademarks and other IPR, cryptographic keys (incl. those who own tokens), shares in companies, fiat currency (if the trust can get a bank account), revenue share rights.
- A open source project could from it’s inception have a trust for the furthering of it and to park the software IPR, domains and infrastructure in.
- A minute trust could exist that terminates after accomplishing it’s quick goal.
- Token trusts could benefit the token holders by buying back the tokens using profits from assets of the trust
- Hosting recovery keys for identities with legal recourse
- Token trusts could invest in other tokens or companies.
- Token trusts could hold 100% ownership of a limited liability company that could act for the benefit of token holders
- Significantly more transparent holdings of assets and visibility on structures
- etc.
The Tulip Trust & what is a trust exactly?
Around the time of the “Somebody is Satoshi” brouhaha, there was talk of ‘The Tulip Trust’ where supposedly the alleged Satoshi coins (around 1M BTC, so 2.8B USD as of today) were placed in. Coming from a civil law country, the concept of a ‘trust’ fascinated me as we have no legal concept like this, except for foundations, bankruptcy trustees and wills.
A trust is a legal concept in common law jurisdictions and a few others (such as Dubai IFC). From Wikipedia: A trust is created by a settlor, who transfers title to some or all of his or her property to a trustee, who then holds title to that property in trust for the benefit of the beneficiaries.
The trust is governed by the terms under which it was created. In most jurisdictions, this requires a contractual trust agreement or deed. It is possible for a single individual to assume the role of more than one of these parties, and for multiple individuals to share a single role. While the trustee is given legal title to the trust property, in accepting the property title, the trustee owes a number of fiduciary duties to the beneficiaries.
Once the initial property is settled and trust document is signed by settlor and trustee(s), the trust comes into existence (can be done orally too, but express trusts are just generally better and easier to administer)
Some points worth noting about the trust relation to the assets of the trustee:
- that personal creditors of the trustee have no recourse against the trust assets
- that the trust assets don’t form part of the trustee’s estate upon his insolvency or bankruptcy
- that the trust assets don’t form part of the matrimonial property of the trustee or his spouse nor part of the trustee’s estate upon his death
- and that the trust assets may be recovered when the trustee, in breach of trust, has mingled trust assets with his own property or has alienated trust assets.
Token holders can be specified as the beneficiaries of a trust
How does this fit in with Ethereum ERC20 tokens?
It is considered such that beneficiaries of a trust can be defined not just as a list of persons, but as a class, such as, the students graduating in 2019 from University of Oxford. It has to be a means to ascertain objectively who (legal persons, or other trusts) are the beneficiaries.
However, some court cases have made this definition more precise, that it “can it be said with certainty that any given individual is or is not a member of the class”.
This is interesting because you can clearly and objectively determine if somebody is a holder of coins of a particular token at a certain time through a simple test:
- simply checking Ethereum ERC20 balanceOf(their address) being above zero
- for the alleged holder to confirm the link between their legal identity and their public keys (through signing a challenge, for example).
This means that you can specify the holders of a particular token as beneficiaries of a trust by utilising this test.
Previous work in this field
Besides the alleged Tulip Trust, I’m not the first to dive into the combination of trusts and blockchain. Otonomos suggested before The DAO went kaboom in one of their DAO proposals to use trusts to allow the DAO to contract in the real world. Pelle Braendgaard played with Trusts without Trustees. Robert Herian explored this as well in Trusteeship in a Post-Trust World: Property, Trusts Law & the Blockchain. Etherplan also explored this in terms of wealth management. Dunning_Krugerrands did as well. There’s some posts on DAOHub as well (1) (2).
Trustees and fiduciary licensing
In many jurisdictions that accept trusts, there is requirement for trustees to be licensed as a fiduciary. This isn’t the case in Hong Kong, where our company, Zipper Global Ltd. is based. It will change in 2018 likely though, and would have to involve a licensed trust company.
It is typically accepted though in other jurisdictions, that you can have a trustee, which is a company (“Private Trust Company”), who has a fiduciary involved in an administrative or governing role, as long as the PTC doesn’t collect any fees or offer it’s services to the public. An alternative is “Private Trust Foundations” in some jurisdictions.
Digital signatures in Hong Kong
The Hong Kong Electronic Transactions Ordinance is quite liberal around digital signatures having legal effect.
“For transactions not involving Government entities, a signature requirement under the law can be met by any form of electronic signature so long as it is reliable, appropriate and agreed by the recipient of the signature. For transactions involving Government entities, a signature requirement under the law can be satisfied by digital signature.”
Practically this means that we get to pick our own means of publishing keys, choice of signature system and so forth for signing electronic documents.
What does this have to do with trusts?
Well, as a start, we could quickly generate and put a Hong Kong jurisdiction trust deed into PDF format and have trustee and settlor sign it cryptographically; making the trust come into legal being at that point. Not to forget, the trust does not come into being until the initial property is settled into it. This could for example be a nominal sum of 1 wei of ETH transferred to a trustee.
Arbitration
It may be wise to include in the trust deed as a means to recognise a beneficiary as such is that they have signed a contract obligating them to solve disputes relating to the trust using online arbitration so trustees and beneficiaries don’t have to travel the world in order to settle a dispute. Something like Pamela Morgan’s Project DAMN (proposal here) could be useful to scale the token trust model.
Let a thousand trusts bloom
So to recap, to create a trust between Settlor Ltd. and PTC Ltd. (HK companies), for the benefit for the holders of a particular token:
- Generate a trust deed document, with a unique name for the Trust, describing the Settlor Ltd. as settlor and PTC Ltd. as trustee. Describe beneficiaries as holders of the token and how to objectively ascertain if a beneficiary is one.
- Settlor and trustee digitally signs the trust deed.
- Settlor transfers 1 wei of ETH to trustee.
- Trust is now legally valid and can hold property; and trustees have legal, fiduciary duties towards the beneficiaries (token holders); pretty much instant — all done within a few block times.
There’s no immediate reason why you couldn’t repeat this process a thousand, or million times. Hence, creating into being thousand trusts and thousand digitally signed trust deeds, existing for the benefits of the holders of the tokens they refer to. This same model may also work in other common law jurisdictions.
Future work
If you’re interested to discuss Token Trusts and develop this concept, please join our Telegram or drop me a line on Twitter. If you have a legal background, you’re very welcome, too.
Carsten (@stskeeps) is CTO at Zipper Global Ltd., (@zipperglobal)
