DAO Politics is a series of podcasts from Cryplogger, in which we, together with invited experts, understand how decentralized autonomous organizations, and talk about their conceptual and technological foundations. In this episode, we start a big conversation about the legal aspects of the DAO with lawyers Baseley&Partners Eliza-Tatyana Vasilyeva and Bogdan Popovchenko.
1. Many DAO creators believe that their organizations are not subject to legal regulation. But in vain. Evangelists, creators, and participants in the DAO are often convinced that they are engaged in activities that are so technologically special that they are not subject to legal regulation. However, in practice, the anonymity and decentralization of the DAO is limited, and ignoring legal formalization is fraught with risks.
In particular, it is possible to define DAO as a general partnership. Key disadvantages of this approach include:
- insecurity of personal assets of partners;
- responsibility of partners for each other’s actions;
- the absence of a commercial organization separate from partners;
- termination of existence due to the death or exit of one of the partners.
2. DAOs can be registered as LLCs, trusts and private foundations. For example, under Wyoming law, DAOs are subject to the same requirements as limited liability companies, with the exception of the requirements relating to the name and governing bodies of the company. This is due to the fact that, unlike the “traditional” LLC, Wyoming DAOs can be managed both by members of the organization and on the basis of algorithms (smart contracts).
An alternative LLC is to set up a DAO as a private foundation or trust. This is due to the fact that the structures of decentralized autonomous organizations, private foundations and trusts have a number of similarities, and autonomy is a key criterion necessary for their existence.
The most common jurisdictions used to set up private funds for blockchain businesses are Switzerland and the Cayman Islands.
The key advantages of Switzerland are the flexible legal regulation applicable to private foundations, which allows formalizing the activities of a DAO, as well as a high reputation and a relatively low tax burden on the activities of the structure.
In the case of the Cayman Islands, it is worth noting the regulation that allows the creation of legal entities that can function as a private foundation or common law trust, while maintaining its legal personality, limited liability and tax neutrality.
3. Many DAOs imitate in their activities the structures that existed long before the blockchain: trusts, private foundations. Many, but not all. Some DAOs implement new economic models and apply various technologies within the system, such as reputation tokenization and event verification. In the Baseley & Partners project, we are trying to build just such a DAO: we unite lawyers who make content contributions, create chat bots within the platform. There are gradations of who and what can verify, which bots to validate, what income to receive from the monetization of intellectual property owned by the organization.
4. Licensing DAO in the EU helps to save money and increase geographic coverage. Organizations that contain so-called Investment Promises (that is, attract investments) need a licensing procedure. In the EU, a passport procedure is provided for this, which allows crypto projects that have received the right to work in one EU country to conduct activities throughout the Union, subject to national legislation. Licenses in Estonia, Bulgaria, Latvia, Lithuania are quite affordable. Therefore, we like the legal regulation of crypto in the EU. It is less developed than in Switzerland, but at the same time it allows you to get an enormous geographical coverage and create a clear legal infrastructure. In the US, the situation is different: each state has its own regulator, and you need to comply with the requirements of the laws.
5. In some states, DAOs are regulated at the local level, but problems may arise when interacting with the Federal Reserve. In the USA, the legal regulation of decentralized autonomous organizations is in Wyoming, Vermont, Delaware, Utah. One state recognition of the DAO as a legal entity is not enough to provide legal protection. If I create such a structure in Utah or the Marshall Islands, then grab all the tokens and disappear with them, the jurisdiction of my location will apply, not Utah or the Marshall Islands.
Wyoming adopted progressive regulation that allowed the DAO to operate anonymously. Everything was fine until the meeting of the local and federal regulator. Crypto exchange Kraken registered in Wyoming, got the opportunity to create a depository institution, but was unable to open master accounts due to regulatory restrictions from the Federal Reserve System. Therefore, state legislation should be evaluated not only in terms of progress, but also in terms of the existing practice of interaction with the federal center.
6. When choosing a jurisdiction, it is important to take into account the opinion of the members of your organization. For our DAO, we considered various forms of territorial binding: DAO with registration in Wyoming, Public Benefit Corporation, a private foundation in Europe, offshore companies in the Marshall Islands. If we had a centralized structure, then we would make a choice based on the location of the decision makers. However, our governance tokens are distributed to the entire community, whose representatives live in different countries.
The reputation of the chosen structure in the eyes of the community is important for us. The issue of monetization is important: how the DAO will interact with the outside world. We have a conservative European and American audience that is more receptive to European private foundations or American trusts than Wyoming and the Marshall Islands.
It is important to choose not the jurisdiction of registration of the DAO, but the regulation at the location of the participants. The Marshall Islands law is better than the Wyoming law in this regard, as it reduces the fiduciary responsibility of participants and recognizes the form of the DAO. It remains an open question which projects will operate under this legislation. Lawyers and legislators should focus less on creating new decentralized instruments than on integrating decentralization into existing legal frameworks.
7. Mass adoption, tax regulation and separation of responsibility of participants will improve the legal regulation of decentralized autonomous organizations. What are the first things DAO enthusiasts look forward to:
- adoption of smart contracts at the global level – in order to replace the paper form and facilitate interactions through smart units and metaverses;
- introduction of a single-level tax payment – only upon receipt of income by the end participant at the place of his residence, without collection at the level of DAO;
- legally transparent approach to delegates. Now there is a problem that in the absence of the possibility of establishing the founder of the DAO, the responsibility can be borne by the developers – persons who did not remain anonymous.
It will not be possible to change all the legislation quickly, it is a long process. In order to “die” fewer pioneers, it is necessary to create islands of safety. Sandbox can act as such an island: everyone who meets a set of criteria is guaranteed a certain approach while the tool is being tested.
So far, the situation looks like this: the communities are doing something, the regulators are attacking them, and the courts are deciding who will survive. It’s a hard road with big losses. Collaboration and interaction with regulators is another way, but here DAO enthusiasts first of all need to learn how to lobby their interests.
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Cryplogger Newsletters: Keep your finger on the pulse of the bitcoin industry!
DAO Politics is a series of podcasts from Cryplogger, in which we, together with invited experts, understand how decentralized autonomous organizations, and talk about their conceptual and technological foundations. In this episode, we start a big conversation about the legal aspects of the DAO with lawyers Baseley&Partners Eliza-Tatyana Vasilyeva and Bogdan Popovchenko.
1. Many DAO creators believe that their organizations are not subject to legal regulation. But in vain. Evangelists, creators, and participants in the DAO are often convinced that they are engaged in activities that are so technologically special that they are not subject to legal regulation. However, in practice, the anonymity and decentralization of the DAO is limited, and ignoring legal formalization is fraught with risks.
In particular, it is possible to define DAO as a general partnership. Key disadvantages of this approach include:
- insecurity of personal assets of partners;
- responsibility of partners for each other’s actions;
- the absence of a commercial organization separate from partners;
- termination of existence due to the death or exit of one of the partners.
2. DAOs can be registered as LLCs, trusts and private foundations. For example, under Wyoming law, DAOs are subject to the same requirements as limited liability companies, with the exception of the requirements relating to the name and governing bodies of the company. This is due to the fact that, unlike the “traditional” LLC, Wyoming DAOs can be managed both by members of the organization and on the basis of algorithms (smart contracts).
An alternative LLC is to set up a DAO as a private foundation or trust. This is due to the fact that the structures of decentralized autonomous organizations, private foundations and trusts have a number of similarities, and autonomy is a key criterion necessary for their existence.
The most common jurisdictions used to set up private funds for blockchain businesses are Switzerland and the Cayman Islands.
The key advantages of Switzerland are the flexible legal regulation applicable to private foundations, which allows formalizing the activities of a DAO, as well as a high reputation and a relatively low tax burden on the activities of the structure.
In the case of the Cayman Islands, it is worth noting the regulation that allows the creation of legal entities that can function as a private foundation or common law trust, while maintaining its legal personality, limited liability and tax neutrality.
3. Many DAOs imitate in their activities the structures that existed long before the blockchain: trusts, private foundations. Many, but not all. Some DAOs implement new economic models and apply various technologies within the system, such as reputation tokenization and event verification. In the Baseley & Partners project, we are trying to build just such a DAO: we unite lawyers who make content contributions, create chat bots within the platform. There are gradations of who and what can verify, which bots to validate, what income to receive from the monetization of intellectual property owned by the organization.
4. Licensing DAO in the EU helps to save money and increase geographic coverage. Organizations that contain so-called Investment Promises (that is, attract investments) need a licensing procedure. In the EU, a passport procedure is provided for this, which allows crypto projects that have received the right to work in one EU country to conduct activities throughout the Union, subject to national legislation. Licenses in Estonia, Bulgaria, Latvia, Lithuania are quite affordable. Therefore, we like the legal regulation of crypto in the EU. It is less developed than in Switzerland, but at the same time it allows you to get an enormous geographical coverage and create a clear legal infrastructure. In the US, the situation is different: each state has its own regulator, and you need to comply with the requirements of the laws.
5. In some states, DAOs are regulated at the local level, but problems may arise when interacting with the Federal Reserve. In the USA, the legal regulation of decentralized autonomous organizations is in Wyoming, Vermont, Delaware, Utah. One state recognition of the DAO as a legal entity is not enough to provide legal protection. If I create such a structure in Utah or the Marshall Islands, then grab all the tokens and disappear with them, the jurisdiction of my location will apply, not Utah or the Marshall Islands.
Wyoming adopted progressive regulation that allowed the DAO to operate anonymously. Everything was fine until the meeting of the local and federal regulator. Crypto exchange Kraken registered in Wyoming, got the opportunity to create a depository institution, but was unable to open master accounts due to regulatory restrictions from the Federal Reserve System. Therefore, state legislation should be evaluated not only in terms of progress, but also in terms of the existing practice of interaction with the federal center.
6. When choosing a jurisdiction, it is important to take into account the opinion of the members of your organization. For our DAO, we considered various forms of territorial binding: DAO with registration in Wyoming, Public Benefit Corporation, a private foundation in Europe, offshore companies in the Marshall Islands. If we had a centralized structure, then we would make a choice based on the location of the decision makers. However, our governance tokens are distributed to the entire community, whose representatives live in different countries.
The reputation of the chosen structure in the eyes of the community is important for us. The issue of monetization is important: how the DAO will interact with the outside world. We have a conservative European and American audience that is more receptive to European private foundations or American trusts than Wyoming and the Marshall Islands.
It is important to choose not the jurisdiction of registration of the DAO, but the regulation at the location of the participants. The Marshall Islands law is better than the Wyoming law in this regard, as it reduces the fiduciary responsibility of participants and recognizes the form of the DAO. It remains an open question which projects will operate under this legislation. Lawyers and legislators should focus less on creating new decentralized instruments than on integrating decentralization into existing legal frameworks.
7. Mass adoption, tax regulation and separation of responsibility of participants will improve the legal regulation of decentralized autonomous organizations. What are the first things DAO enthusiasts look forward to:
- adoption of smart contracts at the global level – in order to replace the paper form and facilitate interactions through smart units and metaverses;
- introduction of a single-level tax payment – only upon receipt of income by the end participant at the place of his residence, without collection at the level of DAO;
- legally transparent approach to delegates. Now there is a problem that in the absence of the possibility of establishing the founder of the DAO, the responsibility can be borne by the developers – persons who did not remain anonymous.
It will not be possible to change all the legislation quickly, it is a long process. In order to “die” fewer pioneers, it is necessary to create islands of safety. Sandbox can act as such an island: everyone who meets a set of criteria is guaranteed a certain approach while the tool is being tested.
So far, the situation looks like this: the communities are doing something, the regulators are attacking them, and the courts are deciding who will survive. It’s a hard road with big losses. Collaboration and interaction with regulators is another way, but here DAO enthusiasts first of all need to learn how to lobby their interests.
Found a mistake in the text? Select it and press CTRL+ENTER
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