David Cooney
Group Partner*
Guernsey
In a remarkable evolution from its origins as a mere memecoin, Shiba Inu - now the 18th-largest cryptocurrency by market capitalisation, valued at an impressive US $8.8 billion - is on the cusp of a bold new chapter: the creation of a decentralised autonomous organisation (DAO). On August 25, Shiba Inu's pseudonymous marketing leader, “Lucie”, announced the team's plans to introduce a DAO, empowering the community of token holders to vote on key initiatives and help steer the project's future direction.1
This development is not only a significant milestone for Shiba Inu but also a watershed moment in the broader cryptocurrency landscape. Launched in August 2020, Shiba Inu has defied the odds, surviving and thriving in the fast-moving blockchain space. With the introduction of a DAO, the project aims to enhance its governance through democratic principles, where decisions will be made collectively by its community.
At the core of this decentralised governance model will likely be a multisignature wallet (Multisig) - an essential tool that ensures community funds are managed with utmost transparency and security. These wallets, which require multiple signatories to approve any expenditure or protocol change, reflect a DAO’s commitment to collective decision-making and accountability.
Shiba Inu’s pivot toward decentralised governance signals its intention to solidify its place in the blockchain world, offering its community not just a token but a voice in shaping its future.
Multisig wallet
A Multisig is a popular choice for enhancing security in cryptocurrency transactions by requiring multiple private keys to authorise a transaction. This structure is especially beneficial for businesses, institutions and DAOs, as it prevents any one individual from having unilateral control over the assets, reducing the risk of theft or misuse. However, while Multisigs add a layer of protection, they are not without risks.
One of the primary concerns is the potential loss of private keys. If one or more participants lose their private keys and the remaining keys do not meet the required threshold for approval, the assets within the wallet may become permanently inaccessible, resulting in an irretrievable loss of funds.
Another critical risk arises from the reliance on trust among participants. If one party involved in the Multisig acts maliciously, uncooperatively or irresponsibly, it can severely disrupt the transaction process, potentially freezing the assets or delaying necessary approvals.
As discussed in more detail below, a Multisig Purpose Trust arrangement serves to mitigate these two risk factors associated with Multisigs in the blockchain space.
Purpose trusts
A trust is a legally binding arrangement in which a person (referred to as the settlor) transfers assets (called trust property) to another person (the trustee), who holds and manages those assets for the benefit of others (the beneficiaries)2 or for a specific purpose. The terms of a trust are typically outlined in a single document known as the trust instrument, as is the case with modern trusts. Trusts are highly flexible and can be tailored to meet the specific needs of a DAO, depending on its objectives. In Guernsey, trusts are governed by the Trusts (Guernsey) Law, 2007 (Trust Law).
A prpose trust is a unique type of trust. Unlike traditional trusts, which benefit beneficiaries, a purpose trust is created to advance certain purposes. These purposes may be charitable, non-charitable, or a mix of both.3 Under the Trust Law, “purpose” is broadly defined as any purpose whatsoever, whether or not involving the conferral of any benefit on any person, and includes, without limitation, the holding or ownership of property and the exercise of “functions”.4
“Functions” refer to non-charitable purposes, and the Trust Law requires that an enforcer be appointed to oversee the trust’s non-charitable purposes (this will be discussed further below).5 In the context of a Multisig Purpose Trust, the purposes primarily involve carrying out critical “functions” related to the operation of the Multisig. These functions include streamlining transaction processes, ensuring secure execution of transactions, and safeguarding the integrity of the DAO protocol through various protective measures.
Additionally, the Guernsey Financial Services Commission does not impose licensing requirements for this arrangement, and the Trust Law does not require trusts to be registered with any central government body, thereby preserving the DAO’s decentralisation.
Certainty of trust property
The Trust Law defines “property”6 broadly and the trust fund can consist of essentially any form of property and the trustee may accept property from any person7 (including an individual, company, foundation, trustees of another trust), provided that it is legally capable of being owned.
However, under the Trust Law, private keys are not considered property per se. As a result, they are not considered trust property in the traditional sense. This means that in order to satisfy the requirements for a valid purpose trust, the trust must always hold a trust fund which comprise of some property.
It is generally accepted that digital tokens can be trust assets as they are probably a form of property, although this is untested as a legal issue in a lot of jurisdictions (including Guernsey). Thus, even if the property is only a nominal amount of fiat currency or a digital token, this should be sufficient to establish a valid purpose trust. Once the trust is validly established and contains some property, it must retain that property throughout its existence, as it is essential for the trust’s continued validity. With this requirement satisfied, it is then acceptable for the purposes of the trust to include the discharge of those “functions” as described above.
Importance of purposes
The Multisig Purpose Trust’s non-charitable purposes must be clearly drafted with sufficient certainty so that they are legally valid and administratively workable. The purposes must be drafted so that the trustees and the enforcer each understand and are able to fulfil their duties under the terms of the purpose trust. Any ambiguity as to what is intended or whether a particular action is within a particular purpose may render a purpose uncertain and possibly the whole trust invalid. It is therefore suggested that expert advice is procured to ensure the trust is administratively workable and does not fall foul of relevant laws and regulations.8
The non-charitable purposes of the Multisig Purpose Trust directly address the key risks associated with the Multisig. The trustees’ responsibilities are carefully defined to ensure they not only carry out transactions in line with the DAO’s protocol, but also take steps to prevent key loss. This includes key rotations,9 additions10 and removals.11 These risk management strategies are clearly specified in the trust’s purposes, ensuring the security and integrity of both the Multisig and the DAO’s protocol.
Trustees and structure of the Multisig Purpose Trust
The trustees of the Multisig Purpose Trust are effectively the co-signatories to the Multisig of the DAO. They are not only responsible to advance or further the purposes of the trust, but also responsible to manage the trust property according to the terms of the trust.
The Multisig Purpose Trust arrangement creates a separate purpose trust for each co-signatory of the Multisig. Each signatory acts as a trustee (who may be a DAO member), and each trust has an enforcer (who can also be a DAO member or an impartial third party) to oversee the functions of the trustees. This ensures that each trustee meets their legal and fiduciary duties (more on this below) as defined by the trust instrument and the Trust Law.
Each key share of the Multisig is settled in a purpose trust, allowing the trustee to execute transactions on behalf of the DAO. One of the trustee’s key duties is to protect and safeguard the assigned key shares, while the enforcer ensures that trustees perform their duties. If a trustee fails to fulfill these obligations, the enforcer has the power to remove and replace them. These safeguards provide a layer of protection that would not otherwise exist outside of a trust arrangement which is crucial when the DAO’s underlying value is US $8.3 billion as in the case of Shiba Inu.
Trustee duties
Malicious actions or uncooperative and irresponsible behaviour by co-signatories to the Multisig are mitigated by the specific role of a trustee within the Multisig Purpose Trust, as well as the oversight provided by the enforcer. When a co-signatory becomes a trustee, they assume personal responsibility in that role.12 Trustees are bound by several important duties, including general fiduciary and statutory duties.13
A key duty in this context is the duty to act with "utmost good faith" and in accordance with the principle of en bon père de famille, meaning a trustee must act as a reasonable and prudent person would, exercising appropriate care and skill.14 Trustees must manage the trust and perform their functions in compliance with the Trust Law and, subject to that, the terms of the trust instrument, always in furtherance or advancement of the trust’s purposes.15 Failure to satisfy these duties can result in a breach of trust, potentially leading to personal liability for the trustee under certain circumstances.
These duties ensure that trustees, as co-signatories to the Multisig, will be cautious and avoid reckless or malicious behaviour to prevent personal liability when executing important transactions for the DAO.
By taking on the role of trustee, co-signatories are entitled to receive professional fees for their services and may be indemnified for any liabilities out of the trust fund (except for liabilities occasioned by the trustee’s own fraud, wilful misconduct or fraud).16
The role of the enforcer
As mentioned above, a key aspect of purpose trusts is the appointment of an enforcer, whose role is to ensure that the trust is properly enforced with respect to its non-charitable purposes. In simple terms, the enforcer's job is to make sure the trustee carries out their duties according to the trust instrument and in line with the trust's purposes. Importantly, the enforcer cannot be a trustee - ensuring their complete independence.17
The enforcer plays a crucial role in the Multisig Purpose Trust arrangement. Their duties are fiduciary in nature,18 meaning they have a positive obligation to be proactive in ensuring that trustees always act in furtherance of the trust's purposes. The enforcer cannot remain passive, as failing to take action could result in a breach of their own duties, leading to personal liability.
For instance, if trustees are required to rotate keys at regular intervals, the enforcer must oversee and ensure that this responsibility is fulfilled by maintaining communication and providing oversight. If the trustees fail to meet this requirement, they would be in breach of trust, giving the enforcer grounds to remove and replace them if necessary.
Like trustees, enforcers may also receive professional fees for their services.19Conclusion
The Multisig Purpose Trust provides an effective solution to mitigate major risks associated with Multisigs in the blockchain space. By placing the key shares of the Multisig within the legal framework of a purpose trust, co-signatories, acting as trustees, are required to operate with care, skill and diligence. This ensures the security and preservation of both the Multisig (and its related smart contracts) as well as the DAO’s protocol. The trust imposes statutory and fiduciary duties on the trustees, holding them accountable for proper key management and offering strong protection against key loss and potential breakdowns in trust between participants.
The independent enforcer plays a critical oversight role, ensuring that trustees act in line with the trust’s purposes, which ultimately serve the interests of the DAO. This setup also provides a structured mechanism for addressing malicious behaviour by trustees and managing key loss effectively.
In summary, the Multisig Purpose Trust introduces an essential layer of governance and protection, ensuring the stability of the Multisig and safeguarding the protocol even in situations where key loss or trust issues could otherwise jeopardise its functioning.
