Temp Check - Does The DAO Need a Legal Entity? Does this need to be discussed?

Does BanklessDAO Need a Legal Entity?

Author: misshomie.eth

Funds Requested: N/A

Date: 9/23/2023

Aligned Units: Treasury, Operations, Governance, Legal

TL:DR

This Temp Check is to investigate the suitability of a Legal Wrapper for BanklessDAO.

Specifically:

  • Does the Entire DAO need a Legal Wrapper?

  • Do only certain aspects of the DAO (subdaos) need a Legal Wrapper?

  • What type of Legal Entity is needed?

Summary:

As the DAO begins to narrow its focus on policy changes, and funding changes for the greater good of the DAO, I have noticed an underlying issue with how those funding, grant making, and governance decisions can open up the DAO to regulatory issues in the months and years to come. Because of these issues, I am proposing a formal discussion regarding the importance of a Legal Entity for BanklessDAO.

This document will serve as the forward-facing discussion surrounding the topic of a Legal Wrapper for BanklessDAO… Over the years, there have been efforts to discuss whether a Legal Entity was needed. These efforts can be found in the following documents:

While these efforts made strides towards gathering information regarding the importance of this effort, it seems that the effort did not come to a solid conclusion.

In this temp check, I hope to gather consensus on whether the Legal Wrapper discussion could reignite, whether the DAO can take measures towards solidifying the Legal Wrapper, or whether the discussion should be shelved. Even though this is a topic that could touch in the realm of Governance, I have decided to house this in the general category due to the nature of this temp-check.

Background:

The topic of Legal Wrappers for DAOs have become increasingly important over recent times. Lawsuits from Ooki DAO, BarnbridgeDAO, and more have led the topic to the forefront once again.

The climate towards DeFi, Crypto, and Web3, has fallen under increasing levels of scrutiny in places such as the United States, the United Kingdom, and China.

The cryptocurrency climate in the United States alone, with regulators taking steps against the ecosystem in various ways, has become a strong enough reason to revisit the topic.

As stated in MIDAO’s guide to Incorporation,

When a group of people works towards a common goal, they are considered a General Partnership by the law unless they have formed a legal entity. In a General Partnership, all members of the aforementioned entity would be considered liable should any injunction take place against the group itself.

As it stands, if there is any wrongdoing by an individual in BanklessDAO that could be detrimental to another person in or out of BanklessDAO, all members of BanklessDAO could be held liable.

In BanklessDAO, there have been dissenting opinions regarding the necessity of a Legal Entity. These arguments focus on the aspect of having an entity KYC themselves for the sake of being a known member of the entity, to BanklessDAO not having a high enough risk profile to warrant the entity.

The goal of this Temp Check is to get a front-facing discussion, and hopefully a decision regarding the entity for the DAO in a single location. We are able to get this conversation in the forefront of every member at every level in the DAO, by reigniting this conversation in the discourse. By conducting this temp check, we can figure out whether the DAO needs the entity.

It is acknowledged that BanklessDAO is in a low risk profile. CFTC Must Serve Ooki DAO Founders: California Judge - Decrypt is an example of this reasoning in action. In theory, because BanklessDAO does not have much action in the realm of Decentralized Finance, or any finance-related DAO matters.

However, we are a DAO that interacts with and serves the public, so there is the chance of risk in our public goods related actions.

We have also had instances where a persons actions have proven to be harmful to the DAO, and to individuals in the DAO. See the following instances below:

BanklessDAO Incident Report - Governance Sybil Attack

Coordinape Incident Report and next steps

These could also stand as instances that could have caused grievances from, and against the DAO.

There is also possibility that as we continue to solidify our treasury, and as we continue to fortify the DAO with various treasury building actions, there is now a higher risk in future seasons for wrongdoing to inadvertently occur.

Financial Implications

Under the current state of BanklessDAO, a lawsuit, or any form of injunction against BanklessDAO can be detrimental. Since BanklessDAO has no legal wrapper, every member would be liable for any judgements or orders against the DAO.

The planning stages that are taking place in order to make the decision to have a legal entity wrapper will not need any funds attached to it.

A legal wrapper can be a start towards protecting members of the DAO against these issues. After deciding whether a legal wrapper is necessary, we can determine the cost of establishing said legal wrapper, and present that cost in a future proposal.

Scope of Work

The Plan is to use this Temp Check as a more formal starting discussion to plan the execution of a legal wrapper. We can use this to make a decision behind whether the DAO needs a legal entity, whether particular guilds need legal entities, or whether no part of the DAO needs an entity.

From there, we can enlist the assistance from a community that has experience in creating legal entities for the DAO. MIDAO via discussion from @jawna.ETH and @thethriller has offered their assistance in a partnership with BanklessDAO that can potentially cover startup costs. This deal will have to be finalized.

From there, we can then make decisions on logistics behind any legal entity processes. Member, Director, or Owner designations can be made at this time. Finally, we can determine the cost of establishing the legal wrapper.

Success or KPIs

  • Cost Analysis of establishing a Legal Entity

  • Research/Report/Risk Analysis of the importance of BanklessDAO having a legal entity

  • An established Legal Entity, or a defined plan for Bankless DAO to have a sort of legal protection for its members

Next Steps

  1. Gather Feedback based on this temp check (i.e. gauge the sentiment of the DAO prior to going forward)

  2. Hold AMA/discussion with MIDAO to answer questions, concerns from the DAO regarding this process

  3. Continue discussion here: dao legal entity notes

  4. Plan for the process to establish the legal entity by (possibly)

  5. Speaking with MIDAO regarding partnership

  6. Speaking with volunteers suggested in LexDAO regarding legal entity

  7. Discussion in Governance (or relevant fields) regarding this process

Now is the time to tell me your opinion:

Should BanklessDAO reignite this Legal Entity Discussion?

  • Yes
  • No
  • I have no opinion
  • I believe in the direction, but I have something else to say in the comments.
0 voters

Do you believe that the DAO needs a Legal Entity (Acknowledging that this is not legal advice)

  • Yes
  • No
  • I have no opinion
  • I believe in the direction, but I have something else to say in the comments.
0 voters
2 Likes

I am not knowledgeable enough about this subject to have a solid opinion, but I do believe it’s a good idea that the DAO arrive at an informed position and then revisit that annually or as regulatory changes might require.
I want to commend you on this well-written proposal and for bringing the topic to discussion.
Thank you :slight_smile:

2 Likes

I am honored to be mentioned here and do believe a legal entity is a good idea. It doesn’t have to be all or nothing, either, ie joining the legal entity as a member could be optional, with people who don’t join still remaining as members “of the DAO”. The entity could also differentiate between contributor levels, etc.

Another note to consider is that the time to do this is during a bear market (now), not while numbers are going up. If you create a legal entity sitting on top of a ton of appreciated assets, the potential tax implications for the individuals involved can be prohibitive.

Of course I am biased since my work is all about legal entities for DAOs and I would be insanely excited if the DAO chooses MIDAO, which I co-founded. And of course… I’m not a lawyer and this is not legal advice.

3 Likes

Thank you!

Also, I appreciate what you said regarding this. Whatever the decision (for or against) it will make sense to revisit this annually or in some sort or periodic measure.

A few random points:

  • during the multisig election, a few people I spoke to decided not to run because they are US-based and worried about the legal implications
    • this season on grants committee, we have 5 active people, because not enough people applied. Could be for the same reason above
  • the primary resource produced by the DAO is Intellectual Property (IP). Without a legal entity, this value cannot be « claimed » by the DAO
    • look at projects like DEGEN who used DAO resources to bootstrap then took the IP and created their own legal entity who owned the IP, giving nothing back to the DAO
  • by the same token, the primary resource the DAO disburses is our brand, which cannot be legally delegated without a legal entity

Personally I am for a legal entity for these reasons.

3 Likes

Thank you for your input on this!

I’m going to say “no, I don’t think the DAO needs a legal entity” because the DAO is its members and it spans the whole globe. A legal entity just jams an experimental state-agnostic model into a neat and tidy template for state control, regulation, and taxation.

However, I acknowledge that certain areas within the DAO might be at more of an advantage in having a legal wrapper. A legal wrapper is a lot easier for sponsors to deal with if we’re trying to encourage projects to generate revenue, and a legal wrapper is ultimately required for some projects (like Bankless Card) that bring products and services to a regulated and jurisdictionally-defined market.

How I think bDAO might be able to provide value would be to publicly aggregate this research, summarize the pros and cons for different setups and jurisdictional choices, and maybe even tag groups or projects that might be best fits for legal wrappers to help them get started. It could be like a cheat sheet or a flow chart or something that helps projects determine if they should have one and provide some resources or examples to get started in doing so.

Personally, I am a potato when it comes to legal stuff. I wouldn’t know where to start and certainly don’t want to have to start at zero. But since some people already have started this research for their own projects, it might be cool to share that info in a publicly accessible way to help future projects get to the moon faster, too.

2 Likes

We have to ask ourselves as a DAO why do we need a legal entity?

Reason 1: KYC for grants/integration with partners/etc…

In this case we may wrap the whole DAO into a single entity at the risk of that legal entity being subjected to censorship or other IRL threats. This would take us as a DAO a step back rather than a step forward when it comes to decentralisation. According to research from Optimism there are two ways DAOs decentralize

:one: DAOs decentralized from the start
:two:Those progressively decentralizing

The first category of DAOs often struggle with cohesion, sometimes ending up implementing a re-centralizing strategy. The second category, although well-coordinate, risks potential capture during the decentralization process.

As a DAO we already started with Path 1 and going back to recentralization means not learning anything from the ecosystem and repeating the same mistakes and potentially risking capture during ‘re-decentralization’

Reason 2: Because we need to limit legal liability

In this case each member in the main multi-sig or the DAO in general can mint their own legal NFT via wrappr.wtf at no cost except gas on L2. Infact folks can do this now for their own wallets connected to DAO activitiy without invoking governance overhead. This way there is no need to take on risk as a DAO as stated in Reason 1

Potential Solution

An elegant solution here is to wrap the DAO’s core units in independent legal wrappers, i.e. each department has their own legal entity in a different unrelated jurisdictions. Ideally these jurisdictions are chosen on their independence from each other as opposed to being in the sphere of influence of the same hegemon

If we combine this approach with giving each multi-sig signer/DAO member their own legal NFT, then we maintain censorship resistance as a DAO while limiting liability for everyone.

1 Like

You bring up some very thoughtful points!

I could potentially see:

BanklessCard
Marketing
Legal Guild
Bwallet
Bankless publishing

Off the top of my head have wrappers… I figure.

What concerns me is the Human Resources side. Should there be a grievance with the changes areas are making regarding the guest pass/level1 tlbank shenanigans, were definitely caught flat-footed.

Thanks for this, jenga:

Going to check this out, and then I can come back with some questions!

We won’t be decentralized if a centralized body is above us to govern/limit us.

@FINE What is grants committee, governance department, so on so forth? They are governing bodies, are they not?

What is the constitution? A governing document.

A legal wrapper isn’t going to be a governing body. Not that i would forsee.

I’m curious about this comment. Please elaborate

As regulation continues to increase the need for a legal entity will become necessary, plus as you highlight having no entity leaves all members of the DAO open to possible legal fines etc…

In addition as the space becomes more regulated and imbedded the need from people and organisations who want to work with BDAO to see some kind of legal entity will increase.

There are many types of entities we can choose from that have trialled many of the concepts that BDAO is using such as Co-Ops.

So with this idea. The wrapper.wtf,

Would you (in theory) have the wrapper personally (so let’s say “miss homie llc” or “jengajojo llc” to protect in a case of you being in an unregulated (unprotected) environment? That’s what it seems like to me here.

Does it end up being cumbersome dealing with X number of legal wrappers versus 1 wrapper (or perhaps a particular number of wrappers covering DAO entities?)

I like the idea personally. At first i wondered if it would be a lot of extra work to configure, but, it would be on the premise that thousands of people would have wrappers, which seems way less likely (I’d probably guess that maybe 30 people would do this based on engagement)

1 Like

Since the wrappers are owned and operated by individuals in their wallets, I believe the DAO has no jurisdiction or liability.

Yeah so this sounds like a basic idea for freelancers which, is sensible.

I’d need to figure out whether it would still make sense to have a legal entity for the greater community. My gut feeling says you would. But I am definitely not versed on employment law or tax law.

So this is what I would say is a good stop gap measure in the meanwhile. It could either serve as the only thing you need, or it would serve as a layer of protection to figure things out in the meanwhile.