Read the proposal:
Date: 13 June 2021
Date posted: 10 June 2021
· Create a Bankless DAO legal entity in the off-chain world able to obtain and provide payments and to be holder of rights
· Capacity to locate the legal entity depending on the different jurisdictions
· Choose between a non-profit or a for-profit legal entity
From the genesis of the Bankless DAO, several members have pointed out the need of setting up a legal entity able to represent the DAO in the off-chain world. Discussions have focused on liability issues for DAO contributors and on practical necessities that the DAO may face in dealing with parties who are external to the blockchain ecosystem. The Legal Guild has conducted research and has assessed alternative solutions, especially on the basis of choices made by other DAOs. In this regard, the Guild had the opportunity to get in contact with Kevin Owocki of Gitcoin and Ross Campbell from LexDAO.
Due to the inherent nature of Blockchain technology, Bankless DAO seeks to be a worldwide movement and, at least in theory, every jurisdiction could be eligible to settle a legal entity. Nevertheless, in light of the benchmarking made by the Legal Guild, only the US and Switzerland were ultimately taken into consideration.
Given that Bankless is intended to be a movement seeking liberation from the oppression of the traditional financial system, the Legal Guild has committed itself to a guiding principle, which could be depicted as “off-chain minimization”. This means that legal compliance issues in the off-chain world should be limited to the minimum: i.e., to matters that are fundamentally necessary to the DAO and its community. The legal entity should be seen as the tip of an iceberg: The foundational structure and the members of the DAO acting all but entirely within the on-chain ocean.
A first solution could be to set up a US LLC. The State of Wyoming will soon up-date the Wyoming Limited Liability Company Act in order to enact a law, which is especially devoted to DAOs. Under the new law, a DAO “is a limited liability company whose articles of organization contain a statement that the company is a decentralized autonomous organization”. A DAO must maintain presence in the state through a registered agent and would need to include in its name a proper designation such as “DAO”, “DAO LLC” or “LAO”. The new law has raised a lot of interest but also some harsh criticism (see Lex_node’s article). Many lawyers argue that also a “simple” LLC could work for the DAO as a legal wrapper. In particular for multisig participants.
A particular attention has been devoted to the State of Delaware and to the possibility of setting up a Ricardian LLC. Ross Campbell has stated that “to host a reasonable legal framework, Delaware law is well understood and can serve to root these “Ricardian LLCs” as a “Series” of entries on a smart contract-based Master LLC Agreement, giving them a unique legal personality to enter agreements and hold off-chain assets”. The solution was also discussed during the meeting between the Legal Guild and LexDAO.
A US non-profit designation or 501(c)3 for an off-chain wrapping of the Bankless DAO is also an option. The non-profit designation comes with some advantages such as not paying income tax, and an on ramp for tax-deductible gifting, as well as disadvantages like tighter rules around operational strategy, and even brand messaging, e.g., must be a-political.
One reason a US non-profit status or US for-profit status could be beneficial is that it puts the DAO in a jurisdiction where much of its contractual relationships may be developed. There is some amount of frictionless-ness baked into entities existing under a similar jurisdiction. Moreover, the tax-exempt status could free up additional funds for furthering the DAO mission, such as educational tactics surrounding blockchain technology.
Generally speaking, a non-profit entity has these three criterion for eligibility:
- Serve the public. 2) Tax exemption. 3. Non-political.
Nonprofits serve the public. This can be in the pursuit of education, science, religion, charity, and others. The DAO might be best suited to serve in the pursuit of education. Demonstrating this service is accomplished by making donation fund use public so all participants know how money is spent. Here is a list of types of charitable organizations that serve the public.
Non-profits can be tax exempt. This requires meeting all guidelines for the 501(c)3 designation laid out by the IRS here. In addition to transparent book-keeping that indicates work being done towards a public good, “none of its earnings may inure to any private shareholder or individual” (IRS).
Nonprofits are a-political. Part of the tax exempt status means that the entity cannot be “an action organization”, which means, “it may not attempt to influence legislation as a substantial part of its activities and it may not participate in any campaign activity for or against candidates” (IRS). In short, it cannot aim to sway or change public opinion on legislation, or political candidates.
As the DAO could or could not one day be interested in backing a potential piece of legislation, or candidate (probably with hilarious and witty memes) and promoting it or them this should be factored in when considering this route of legal designation.
The other examined option is the Swiss Verein, a non-profit association (see the Guild report and the video posted by Yves). What was written for the US non-profit association is in substance true also for the Swiss Verein, except for the non-political nature.
It should be noted that Swiss associations have proper legal personalities, just like companies or foundations. As such, Swiss law provides relatively flexible and simple regulation, and so long as the association is non-profit, there are no filing requirements. The associations are thus established as limited liability businesses and are therefore discussed as viable vehicles for DAOs.
A Swiss lawyer suggested that the Bankless DAO, as a digital organization, could be a member of the association and donate part of its treasury to the association. In other words, the on-chain Bankless DAO would be a founding member of the Bankless DAO Swiss association. Bankless LLC could be an additional member of the association. With minimal effort, the Bankless DAO, through a Swiss association, would solve the practical problem of having a spin-off legal entity in the off-chain world. Moreover, this entity would be entitled to a Swiss bank account capable of dealing in cryptocurrencies.
The costs of setting up an LLC would be approximately 2.5K USD (1.05 Ether).
The costs of setting up a US non-profit association would be approximately 5-10K USD (2.10-4.20 Ether) (presumably includes hiring a qualified attorney and paying necessary fees). Price could vary depending on the attorney.
The costs of setting up a Swiss association would be approximately 5k Swiss Francs (CHF) (5.6k USD; 2.35 Ether).
The name of the legal entity would probably include the expression Bankless DAO.
Every solution has advantages and drawbacks. The majority of the Bankless community lives in the US and the DAO would probably have more contacts with US contracting parties. Therefore, having a legal entity in the US could ease things from an operational point of view.
On the other side, Switzerland offers a very crypto-friendly environment and could foster the idea that the Bankless community has a global scope. The Swiss Verein could also be open to new members (entities representing local chapters or Guilds).
It should be noted that no-one of the proposed solutions would solve the issue (where existent) of potential liability for members that are not shielded by a legal entity.
· Involve the Bankless LLC
· Get in contact with lawyers to discuss the details
· Snapshot vote on the different solutions
@Eagle is a Law Professor and Attorney with a European juridical background. He teaches topics related to blockchain and emerging digital technologies. He is trying to ameliorate his technical knowledge of DAOs and smart contract solutions.
- I think that we are still not ready to take a decision on such a matter
- I would further investigate only a US based solution
- I would further investigate only on the Swiss Verein
- I would further investigate both, a US based solution and the Swiss Verein