¶ 3501
Overview
Scope of the chapter. Digital assets reached family trusts before the law of trusts had settled how a trustee should hold them. Settlors who acquired bitcoin, ether and other tokens early now hold positions large enough to call for long-term planning. They want those positions to pass through trusts in the same way as stock, real estate and private businesses. This chapter examines the design of a trust that is to hold digital assets. It covers the characterization of a digital asset as property and the control rules of Article 12 of the Uniform Commercial Code; the funding of a trust with assets that are transferred by moving control of a private key; the fiduciary access statutes that govern a trustee's dealings with online accounts; the custody arrangements available to a trustee and the risks each carries; the trustee's investment duties and their modification; the failure of custodial platforms and the loss of keys, with case discussions of the Celsius bankruptcy and the English landfill litigation in Howells v Newport City Council; the treatment of staking rewards, airdrops and forks for income tax and trust accounting; information reporting, offshore trustees and decentralized autonomous organization limited liability companies held in trust; and drafting.
What is different about digital assets. A digital asset differs from the other assets examined in Part VII in four respects that matter to a trustee. First, the asset is transferred by the exercise of a cryptographic key, and whoever can exercise the key can move the asset, whatever the trust instrument says about title. Second, a transfer on a public blockchain is ordinarily final; there is no registrar to reverse it and no transfer agent to refuse a forged instruction. Third, the asset can be lost entirely through the loss of the key, without any wrongdoing by anyone, and the loss cannot be cured by a court order directed to the network. Fourth, the asset is volatile and frequently concentrated, because a settlor who has held a single token for a decade will often hold little else of comparable value. Each of these features bears on a different part of trust design: the first on funding and control, the second and third on custody and succession, and the fourth on the investment duty and its waiver.
Relation to other chapters. The directed-trust structures examined in Part II are the usual means of allocating custody and investment decisions for digital assets between a trustee and a family adviser (see supra chs. 6–10). The special-holdings direction and retention clauses examined in chapter 31 apply to a concentrated digital asset position in the same way as to a concentrated stock position (see supra ch. 31). Trust-owned entities, including limited liability companies formed to hold digital assets, are examined in chapter 30 (see supra ch. 30). Spendthrift protection, self-settled trusts and creditor issues are examined in Part VIII (see infra chs. 36–39), and grantor-trust status and cross-border classification in Part IX (see infra chs. 40, 43). The field as a whole, including the regulation of custodians and exchanges, the taxation of digital asset transactions and the remedies of creditors, is treated at length in the companion volume, Lighthouse on Digital Assets: Property, Custody, Fiduciaries and Regulation, to which this chapter refers as the fuller treatment. This chapter concentrates on the questions a trust drafter and a trustee must answer.
Terminology. This chapter uses "digital asset" in its general sense, for a token or other record of value maintained on a distributed ledger and transferred by means of a cryptographic key. Statutes use narrower or broader definitions, and the definition that applies depends on the statute. The fiduciary access statutes use the term in a far wider sense, to include electronic records of every kind in which an individual has a right or interest (see infra ¶ 3530.02). The term "private key" means the secret cryptographic data whose use authorizes a transaction. A "wallet" is software or hardware that stores keys and constructs transactions. "Self-custody" means that the owner, or the trustee, holds the keys; "third-party custody" means that a custodian holds them on the owner's behalf. A "multisignature" arrangement requires more than one key to authorize a transaction.