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Trust Law/Level IX · Trusts on chain/9.3 Full circle/Lesson 3

The three roles on a blockchain

How the settlor, trustee and beneficiary map onto funders, key holders, multisig signers, smart-contract administrators and token holders, and where the comparison breaks down.

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. Simplest lawful setup: if one person holds every key and is the only person entitled, no trust exists or is needed; plain ownership, a will and instructions suffice. Catch: with no separation of title, the coins pass as part of that person’s estate.
  2. To make a key holder accountable, name them trustee or agent in writing, meeting the three certainties (Knight v Knight, 1840); holding a key alone creates no fiduciary duty. Catch: the document moves no coins, so the keys must match it.
  3. Model a multisig on co-trustees, who may act by majority under UTC §703 unless the terms say otherwise, and state this in the trust. Catch: the network checks only signatures, so disloyal signers answer only through a court.
  4. Before relying on token rights, check for admin or upgrade keys and read the legal agreements behind the token. Catch: equity acts in personam, so a court can order key holders to act, but it cannot sign without a key.

MaterialsLesson 1.1.1, on the three roles, and lesson 1.1.5, on legal title, beneficial ownership and the merger ruleLesson 9.1.3, on multisig and time-locks, and lesson 9.2.5, on smart contracts and the word ‘trustless’The Law Commission of England and Wales’s 2021 advice on smart legal contracts, free on its website

Wonder

  1. If one person holds the only key to coins meant for someone else, is that person a trustee?
  2. Does holding one of the keys in a multisig arrangement make someone a fiduciary?
  3. When code does something its users did not intend, whom can a court order to put it right?

Explore

  1. Level I described three roles: the settlor creates and funds a trust, the trustee holds legal title and manages the property, and the beneficiary holds the beneficial interest. On a blockchain, control works differently: whoever can sign with a private key controls the coins in practice, whatever any document says (lesson 9.1.2). A tempting map is that whoever funds a wallet or contract is like a settlor, whoever holds the signing keys is like a trustee, and whoever is meant to receive the coins is like a beneficiary. This lesson tests that map. It explains concepts and recommends no arrangement, product or provider.
  2. The map holds in one respect: control and benefit can be separated. A person can hold keys to coins meant for someone else, just as a trustee holds legal title for beneficiaries. But a key is a technical fact, not a legal title. Holding a key does not by itself create a trust or any fiduciary duty, and a document saying a trust exists does not move any coins. Whether a key holder is a trustee depends on the law, for example on whether the three certainties of Knight v Knight (1840) are met: intention to create a trust, identifiable property and identifiable beneficiaries.
  3. A multisignature arrangement needs m of n keys to move coins (lesson 9.1.3). It resembles co-trustees: under Uniform Trust Code §703, co-trustees who cannot agree unanimously may act by majority, unless the trust terms say otherwise. The difference is what binds them. Co-trustees owe fiduciary duties, and each must take reasonable care to prevent another from committing a serious breach of trust. A multisig signer owes such duties only if the law gives the signer a fiduciary role, for example as a named trustee or an agent. The network checks only that enough valid signatures are present; it cannot tell a faithful signature from a disloyal one.
  4. A smart contract is code and data deployed using cryptographically signed transactions on a blockchain (NIST, 2018). Deployed code is generally immutable by design, but many contracts use upgrade patterns or an administrator key that can change, pause or redirect them. Whoever holds such a key has trustee-like power without necessarily having trustee-like duties. Token holders can look like beneficiaries, but what rights they have, and against whom, depends on the law and on any legal agreements behind the token, not on the token alone. The analogy is useful for asking who controls, who benefits and who answers, but it does not answer those questions.
  5. Two limits stand out. First, the merger rule: if the sole trustee is also the sole beneficiary of all present and future interests, legal and beneficial title merge and the trust ends (lesson 1.1.5). A wallet whose only key holder is also the only person entitled to the coins has the same shape: there is no separation, only ownership, and no one else to answer to. Second, there is no court of conscience on-chain. The Court of Chancery developed equity to correct unconscionable results (lesson 1.2.5), but a blockchain executes any validly signed transaction, fair or not.
  6. That does not put coins beyond the law. Equity acts in personam: a court’s order binds a person, so a court can order a person who holds keys to act, and can order compensation for a breach of trust. What a court cannot do is sign a transaction without a key. In November 2021, the Law Commission of England and Wales advised that the law of England and Wales can facilitate and support smart legal contracts; whether a particular arrangement is binding still depends on ordinary contract principles, and other countries may answer differently. The Blockchain Academy covers the technical side of keys and smart contracts.

Key facts

  • Whoever can sign with a private key controls coins in practice, but holding a key does not by itself create a trust or a fiduciary duty.
  • A multisig arrangement resembles co-trustees acting by majority under Uniform Trust Code §703, but signers owe fiduciary duties only if the law gives them a fiduciary role.
  • Deployed smart-contract code is generally immutable by design, but upgrade patterns and administrator keys can let someone change how a contract behaves.
  • If the sole trustee is also the sole beneficiary of all present and future interests, legal and beneficial title merge and the trust ends; a wallet whose only key holder is the only person entitled has the same shape.
  • A blockchain has no court of conscience, but because equity acts in personam, a court can make orders against the people who hold keys.
  • In November 2021, the Law Commission of England and Wales advised that the law of England and Wales can facilitate and support smart legal contracts.

Exercise nine, six, three, one

9CollectList up to 9 roles or features of a blockchain arrangement described in this lesson or a source you are reading (some sources give fewer), such as who funded it, who holds each key, who can upgrade the code and who is meant to benefit.
6ClusterSort them into 6 categories: funders, key holders, multisig signers, contract administrators, intended recipients, and courts and law.
3DistillReduce the 6 categories to 3 groups matching the trust roles: settlor-like, trustee-like and beneficiary-like, noting any item that fits none.
1CrystallizeWrite 1 sentence explaining, in your own words, why holding a private key is not the same as holding legal title as a trustee.

Fact check

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

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