Does Bitcoin Need a Private Trust?

One of the bigger pieces of Bitcoin news lately is of course the foundation of SecondMarket’s Bitcoin Investment Trust (BIT). If, like me, you frequent the Bitcoin subreddit, you’ve probably seen the news posted a dozen times by now. If, like me, you also read the comments on Reddit then you also know that a lot of folks don’t seem to know what a private trust actually is and some don’t really think we need one.

First things first, before we can decide if Bitcoin actually needs a trust, we should establish what a trust actually is.

In common law legal systems, a trust is a relationship whereby property is held by one party for the benefit of another. A trust is created by a settlor, who transfers some or all of his or her property to a trustee. The trustee holds that property for the trust’s beneficiaries. Trusts have developed since Roman times and have become one of the most important innovations in property law.

Thanks, Wikipedia. If that still seems a little thick, BIT has actually done a pretty good job of stating it in much simpler terms:

The Bitcoin Investment Trust is designed for sophisticated investors looking for exposure to bitcoin in a simple investment vehicle. The BIT addresses the confusing and cumbersome experience of buying, storing and safekeeping large quantities of bitcoins as an investment.

Essentially, a trust is an investment vehicle in which the investor gives over management of their assets to a third party, in this case allowing individuals to buy and sell large amounts of bitcoin without having to deal with the hassles of actually buying, selling and holding Bitcoin.

By far the most common criticism heard in comments is that BIT charges fees (1.5% front and back, 2% annual) and a DIY solution is fee-free forever. Second most common is that BIT shares are worth 0.1 BTC, potentially adding confusion to the buying, selling and trading of shares.

Now I’m not so worried about the denomination problem. It seems to me that anyone with the finances and savvy to have dealings with such a private trust has probably mastered the fine art of multiplying by 10. The fee thing, on the other hand, actually seems like a reasonable statement. After all, I rolled my own high-security offline wallet and it didn’t seem all that difficult – is there really a market for securely storing other folks’ coins?

My personal experience says yes. Granted, I’ve only ever stored small amounts for friends and family and I never charge them fees, but the point remains the same: I found it easy to roll my own solution specifically because I do this sort of thing for a living. Key management, encrypted LVM partitions, air gap security – it’s all in a day’s work for me. While tutorials and devices for making the process easier are quite common, the amount of knowledge and effort required aren’t really reasonable for the average person – managed solutions are certainly necessary.

But in the form of a trust? Sure, this lends some serious credibility – I won’t argue that it’s not a big deal because it absolutely is – but trusts are also complicated. Trusts exist within a fairly complex legal framework and aren’t really designed for average everyday people, they’re made for the kind of people who have quite a bit to invest – even BIT’s minimum buy-in is $25,000. So do we really need a trust or is the ideal model perhaps more like a bank?

OK, not a bank like the ones we have now, but an old-timey bank like we all imagine they’re supposed to work: you have money, they have a vault and for a small fee they will store your money in their vault and insure it against theft. No denomination requirements, no investor accreditation process, just deposits and withdrawals.

To some extent these services already exist: CoinBase, for example, does offer cold storage for deposited funds and they’re far from alone. Cold storage as a service is an obvious business model for Bitcoin and there are plenty of people offering it, though to my knowledge there is no Bitcoin version of FDIC (deposit insurance) just yet. More importantly, it seems like such a bank would effectively offer the services of a trust, minus the convenience of having a broker buy and sell on your behalf. Of course most banks expand their business into loans, stocks, bonds etc anyway so a Bitcoin bank having a broker on hand doesn’t seem like much of a stretch and that one thing would, in my opinion, make the entire trust model unnecessary.

Or perhaps I’m wrong. Maybe I’m just one of those young(ish) disruptive hacker types who is automatically biased against traditional systems simply because they’re traditional. What do you think?