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Trust Law/Level IX · Trusts on chain/9.2 Tokens and real-world assets/Lesson 2

Delaware statutory trusts and tokenisation

Why the Delaware statutory trust is used as a legal wrapper for funds and spot bitcoin ETFs, how Delaware law allows ownership records on distributed ledgers, and what a blockchain register does not change.

Education, not legal advice. Trust law changes from country to country and state to state, and the right structure depends on your situation. Anything you sign should be drafted or reviewed by a qualified lawyer where you live.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. The main tax use of a Delaware statutory trust is real estate: exchange investment property for DST interests under IRC §1031 to defer gain, if the trustee cannot vary the investment (Rev. Rul. 2004-86). Catch: identify replacements within 45 days and close within 180.
  2. Most investors need no statutory trust of their own: buying listed shares of an existing one avoids formation, Delaware-trustee and legal costs. Catch: those shares are securities, so read the prospectus for fees and the trust’s powers.
  3. A beneficial owner’s creditors cannot reach the trust’s property (12 Del. C. §3805(b)), and ownership may be recorded on a blockchain if the governing instrument says so (§3801(a)). Catch: only the instrument’s procedures can correct the register after a lost key.
  4. Forming one needs a filed certificate of trust and a Delaware-resident trustee (§§3810, 3807), and the instrument may trim duties except the implied covenant of good faith (§3806(c)). Catch: interests sold to investors still need securities registration or an exemption.

MaterialsThe Delaware Statutory Trust Act, 12 Del. C. chapter 38, especially §§3801, 3805, 3807 and 3819, free on the Delaware Code websiteDelaware General Corporation Law §224 (form of records), free on the Delaware Code websiteThe annual report (Form 10-K) of a spot bitcoin exchange-traded product formed as a Delaware statutory trust, free on the SEC’s EDGAR websiteLesson 7.2.3, on Delaware statutory trusts and Rev. Rul. 2004-86, for background

Wonder

  1. Why would a fund that holds bitcoin be organised as a trust rather than a company?
  2. What does it mean for Delaware law to allow ownership records on ‘distributed electronic networks or databases’?
  3. What questions does a blockchain register leave unanswered?

Explore

  1. The Delaware Statutory Trust Act was enacted in 1988 as the Delaware Business Trust Act and renamed in 2002; it is 12 Del. C. chapter 38 (lesson 7.2.3). A statutory trust is formed under a governing instrument and by filing a certificate of trust with the Delaware Secretary of State (§3810), and unless its documents provide otherwise it is a separate legal entity that can sue and be sued. The governing instrument has wide freedom: under §3806(c) it may expand, restrict or eliminate duties, including fiduciary duties, but not the implied covenant of good faith and fair dealing. This lesson describes the law and does not recommend any structure or product.
  2. That flexibility is why the form is common for investment vehicles, including mutual funds and many exchange-traded products. Several US spot bitcoin exchange-traded products are Delaware statutory trusts: for example, the annual report of one says it was formed as a Delaware statutory trust on 8 June 2023 and is governed by a trust agreement among its sponsor, its trustee and a Delaware trustee (lesson 9.2.3). Under §3807, every statutory trust must have at least one trustee resident in Delaware or with its principal place of business there, unless it is a registered investment company that keeps a registered office and agent in the state.
  3. In 2017, Delaware amended its General Corporation Law, including §§219, 224 and 232, effective 1 August 2017. The bill’s synopsis said the changes gave corporations specific authority to use networks of electronic databases, such as ‘distributed ledgers’ or a ‘blockchain’, for corporate records. §224 now lets a corporation keep records, including its stock ledger, on ‘1 or more distributed electronic networks or databases’, provided they can be converted into clearly legible paper form within a reasonable time. These amendments apply to corporations, not to statutory trusts.
  4. The Statutory Trust Act has its own, similar language. §3801(a) says a beneficial owner’s ownership is determined and evidenced, as the governing instrument provides, by registration, including on ‘distributed electronic networks or databases’, by certificates or otherwise, and §3819(d) lets a statutory trust keep its books and records on such networks if they can be converted into paper form within a reasonable time. So Delaware law permits a statutory trust to keep its register of beneficial owners on a blockchain if its governing instrument provides for it, which is the legal basis for ‘tokenised’ trust interests.
  5. A digital register does not change the rest of the law. Under §3805(b), a beneficial owner’s creditors cannot take possession of, or exercise remedies against, the trust’s property, and §3805(c) treats a beneficial interest as personal property. Securities law applies to interests offered to investors whatever the record-keeping method. Federal tax classification also depends on what the trust does, not on its ledger: under Rev. Rul. 2004-86, a statutory trust was classified as a trust only because its trustee had no power to vary the investment, and that ruling concerned real estate and §1031, not tokens (lesson 7.2.3).
  6. There are practical limits too. A token transfer on a blockchain changes the register only if the governing instrument says it does, and a lost or stolen key can leave a register showing the wrong owner until the documents’ procedures are used to correct it. Other states and countries may not treat a blockchain record the same way. Anyone looking at a tokenised statutory trust would need to read its governing instrument and offering documents, and have them reviewed by a qualified adviser; this lesson gives no view on any offering.

Key facts

  • The Delaware Statutory Trust Act was enacted in 1988 as the Delaware Business Trust Act and renamed in 2002; it is 12 Del. C. chapter 38.
  • Many investment vehicles, including several US spot bitcoin exchange-traded products, are organised as Delaware statutory trusts.
  • Delaware’s 2017 amendments to its General Corporation Law, including §§219, 224 and 232, authorised corporate records such as stock ledgers on distributed electronic networks or databases.
  • 12 Del. C. §3801(a) and §3819(d) let a statutory trust record beneficial ownership and keep its records on distributed electronic networks or databases.
  • Under 12 Del. C. §3805(b), a beneficial owner’s creditors cannot reach the statutory trust’s property.
  • A blockchain register does not change securities law or federal tax classification, which depends on the trust’s powers (Rev. Rul. 2004-86).

Exercise nine, six, three, one

9CollectList up to 9 features of a Delaware statutory trust used as a wrapper, from this lesson or a statute or filing you are reading (some sources give fewer), such as how it is formed, who must be its trustee, how ownership is recorded and what creditors can reach.
6ClusterSort them into 6 categories: formation, trustees and roles, ownership records, creditor protection, tax classification, and securities law.
3DistillReduce the 6 categories to 3 groups: what Delaware law allows, what the governing instrument decides, and what other laws still control.
1CrystallizeWrite 1 sentence explaining, in your own words, why keeping a statutory trust’s register on a blockchain does not change how the trust is taxed.

Fact check

Dates, figures and claims checked against the published sources listed below.

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