How does blockchain make trusts more transparent?

Rage Commentary : The recent high-profile UK scandal has put offshore trust institutions under scrutiny, and whether trust institutions should be subject to open public supervision has attracted much attention. The transparency and anonymity of blockchain solve this problem well. This article introduces the origin of trust institutions, which adopt a private model. It will take some time to develop a "smart trust" that can serve various trust types. Blockchain is a highly reliable witness to transaction information. Moreover, in the process of adding or registering information on the blockchain, the information is public, allowing the public to conduct open and transparent supervision. This does not mean that blockchain is not private - the cultural and commercial sensitivities of financial information will still be retained - but in another way.

Translation: Nicole

Robert Herian is a lecturer at the Open University and a visiting lecturer at Birkbeck College, University of London. He holds a BA from King's College, Cambridge University, London, and a LL.M. from Birkbeck College, University of London.

In the article, Herian discusses the recent high-profile UK scandal and how blockchain can provide a solution to this ethical dilemma.

Offshore trusts came under increased scrutiny in 2013 after British Prime Minister David Innes blocked EU transparency rules amid a furious backlash over tax issues. Trusts should not be held to the same standards as companies when it comes to disclosing ultimate owners and beneficiaries.

But now the Panama Papers raise important questions about whether trusts should be more open to public scrutiny. The main reason is that this involves tax fairness. However, blockchain can provide a solution to this problem, making trusts more transparent while ensuring the security of holdings.

Trusts are often very complex legal arrangements, but their fundamental basis is the same. Originally conceived hundreds of years ago, trusts provide a very unique method of managing property. The unique use of property relies on the separation of beneficial ownership and legal responsibility for managing the property.

Trusts come in both public and private forms. But trusts have always been born out of the desire of individuals and families to preserve their wealth and, more importantly, pass it on to the next generation.

Origin of the Trust

A popular story about the origins of trusts is that in the 11th and 12th centuries, a group of Crusaders, before leaving for war in the Middle East, asked a trusted friend (the trustee) to look after their lands on behalf of their families (the beneficiaries).

This method of transferring property management was not previously recognized by the Common Law, which held that when land was given to a friend to manage, it belonged entirely to the friend.

But Equity, a separate legal entity in England and Wales, sees things differently.

To achieve fairness, Equity creates rules to protect the interests of family beneficiaries while imposing strict fiduciary duties and responsibilities and loyalty to friends. This means that when a Crusader directly appoints a friend to look after the property, the friend must look after their property.

Trusts now appear in the form of: international business investment and trading vehicles; public and private pension funds; and charities. There are many more, but I will start with the three that make the most economic sense.

However, the common foundation and principle of mutual consent of the Crusaders, friends and family have basically been preserved to this day.

This means that trusts follow the traditional privacy model found throughout banking and finance, where the public cannot see the specific objects of the trust, nor can they see many of the trust's investments and transactions.

The same method used by trust institutions to ‘hide’ such high levels of transparency can be applied to blockchain.

Smart Contracts

As part of some recent research, I have been considering how blockchain technology (most notably its role in the digital currency Bitcoin) and other blockchain applications such as legal processes (computer program 'smart contracts') could be applied to trust law and escrow.

The key to whether blockchain technology can make trusts more public lies in its fundamental characteristics.

Blockchain is essentially a peer-to-peer distributed ledger system that can register information in an unalterable way, which allows registrants to have legal ownership and beneficial rights of property, both of which are crucial to trust institutions.

In this sense, blockchain is a highly reliable witness of transaction information. Moreover, in the process of adding or registering information on the blockchain, the information is public, allowing the public to conduct open and transparent supervision.

This doesn’t mean that blockchains aren’t private — the cultural and commercial sensitivities of financial information will still be preserved — but in a different way.

There are two sets of encryption locks, one is public and the other is private. Verifying transactions ensures transaction security, and private areas will never be made public.

Unlike other methods that protect the privacy of investment transactions by hiding the entire process (including personally identifiable information), blockchain information flows into another area: by keeping the keys anonymous.

So trust can be done in a 'private space'. More specifically, a legitimate trust institution can join the blockchain process in a 'private space'. This will create a 'smart trust' - a secure private space, but also subject to public supervision.

The benefit of blockchain described above is the 'third party' of the existing private model.

Because there are many types of trust institutions, it is undeniable that blockchain 'smart trusts' can meet the needs of some types of trust institutions - but not all types of trust institutions. Trusts have a long history, while blockchain has a very short history. It will take some time for the two to work together.

But if more fidelity and transparency are needed, blockchain can provide a solution.