Key points on what is DAO?
A decentralized autonomous organization (DAO) is a new-generation organizational structure with no central governing body whose members participate in the governance and share a common goal depending on the aim of a DAO.
Power in a DAO is distributed across tokenholders who collectively cast votes, with all votes and activity generally posted on a blockchain.
Security must be prioritized in a DAO, as exploits can lead to the loss of funds from the DAO treasury.
Does your DAO need a legal wrapper?
Personal Liability. A DAO needs a legal wrapper for many reasons; chief among them is the need to interact with other parties, protect the liability of contributors, hire employees legally, and pay taxes. A DAO would be considered a general partnership without a legal wrapper, or even each DAO member may be treated as a single person operating without a business license. Non-wrapped DAO leaves all of the contributors exposed to potential lawsuits and liabilities.
Corporate Personhood. When entering into agreements with other parties like investors or vendors, a DAO must have corporate personhood to sign legally binding contracts. Without this corporate persona, any agreements made in the name of the DAO may not hold up in court. Similarly, if your DAO wants to hire employees (or contractors), it will need to create some form of legal structure in order to register those hires and pay taxes accordingly.
Transparency and Accountability. By creating a legal wrapper for your DAO, you can also gain access to more funding opportunities and require greater transparency from your contributors when making decisions or voting on proposals. This is because when you incorporate as an LLC or other entity type, certain rules and regulations must be followed within the organization. For example, there may be restrictions on allocating or using funds and reporting requirements regarding contributor activities and decision-making processes. By creating these guidelines, you can ensure that all decisions are fair and transparent while avoiding any potential conflicts of interest within the organization.
Compliance. Ultimately, having a legal wrapper for your DAO is essential if you want it to operate successfully in compliance with local laws and regulations while providing protection for everyone involved in the organization from liabilities or lawsuits arising from its actions. It also helps keep everyone accountable for their actions since they know there will be consequences if they fail to follow proper rules and procedures put in place by the legal structure surrounding their operation.
What Options for Legal Wrappers Are There (Non-U.S. Based)?
The Marshall Islands are a good place to register a DAO because they have a legal framework that recognizes DAOs as their own entity.
This is especially helpful for those who want to avoid registering an LLC separately or those based outside of the US who still want access to US services.
The Swiss Association is a legal wrapper for DAOs, providing them with a framework to register as nonprofit organizations in Switzerland. This option offers DAOs the opportunity to gain recognition in a country that is seen by many as being one of the most blockchain-friendly countries in the world. It allows them to be seen as an official, legitimate entity that can operate within the confines of the country's regulations.
The process of setting up and registering with this framework does not require an extensive amount of paperwork; however, it does require that DAOs present their bylaws upfront and list their board members before registration can be completed. While this does not allow for full decentralization, it does provide reliable protection from potential legal attacks or other negative consequences associated with operating without a recognized organizational structure.
For early-stage DAOs looking for an easy way to obtain recognition while still keeping some level of decentralization, the Swiss Association framework can be a great solution. One added benefit is that it can be used by any DAO regardless of its location, making it highly accessible no matter where one is based. Additionally, assuming all criteria are met, such as having board members ready to appoint and well-defined bylaws prepared beforehand, then setting up a Swiss Association should be relatively straightforward and efficient.
Due to its regulatory environment and legal framework, the Cayman Islands is an ideal jurisdiction to create a Legal Wrapper for DAO. The country has adopted special regulations for Virtual Assets Service Providers (VASPs), which provide clear guidance on how companies should work with virtual assets. This ensures that companies have the necessary information they need to set up a compliant operation. Furthermore, the flexibility of the common law system in the Cayman Islands makes it quite universal in its application and operation around the world. Companies can create a trust or a foundation in this jurisdiction, with the latter being the most suitable form for a DAO wrapper, as there are no centralized owners or shareholders within a DAO entity. This type of legal entity also provides protection from legal disputes and offers tax benefits for users of such structures.
The cost of registering a foundation in the Caymans Islands is lower compared to other jurisdictions such as Switzerland, Singapore, and Liechtenstein. There are also no mandatory minimum contributions that can affect the cost. In addition, setting up a DAO Foundation usually takes only 1-2 months, making it much faster than other jurisdictions.
The many advantages of the Cayman Islands as a DAO legal wrapper make it one of the most popular jurisdictions when creating an entity related to distributed autonomous organizations (DAOs). Aside from having favorable regulations and low costs, companies can benefit from quick setup times and highly reliable legal protection with respect to their digital assets. As such, this jurisdiction is ideal for those looking to reap all available benefits when launching a distributed autonomous organization.
Do not hesitate to contact us! Members of our team are big fans of new technologies and organizational structures. We are helping our clients to set up DAOs constantly and know all pitfalls of each jurisdiction. We propose affordable legal solutions for startups of any size.
DISCLAIMER: The information provided is not legal, tax, or accounting advice and should not be used as such. It is for discussion purposes only. Seek guidance from your own legal counsel and advisors on any matters. The views presented are those of the author and not any other individual or organization. The information provided is for general educational purposes only and is not investment advice. The author of this material makes no guarantees or warranties about the accuracy or completeness of the information. Any action taken based on the information discussed should be reviewed with a professional. The author is not liable for any loss from acting on the information discussed.
Comments