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DAO compliance challenges, and case studies

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FWB, BanklessDAO, GitcoinDAO, Mirror DAO, etc., these top DAOs are currently exploring how to solve compliance issues.

Original title: "DAO Compliance Challenges and Case Analysis"

Original source: Shawn, SeeDao, BanklessDao and other contributors

< p>FWB, BanklessDAO, GitcoinDAO, Mirror DAO, etc., these top DAOs are currently exploring how to solve compliance issues.

1. Why does DAO need a legal entity?

In 2022, various DAOs have established legal entities. First, ENS DAO established a non-profit organization in the Cayman Islands: ENS Foundation. Then GitcoinDAO launched a proposal to learn from ENS and set up a Gitcoin Foundation in the Cayman Islands. SushiSwap and ApeCoin followed closely behind.

Wouldn't it be nice if DAO had no legal entity and was not regulated by any country?

GitcoinDAO issued an article explaining the problem more comprehensively:

1> With Gitcoin Foundations, $GTC holders only need to bear limited liability for the actions of DAO; if there is no legal entity, $GTC holders will personally bear unlimited liability;

2>Tax considerations. Without a legal entity, individual $GTC holders may be required to pay taxes on the DAO's income, even if the income belongs to the DAO treasury and is not distributed to individuals.

3> Sign the contract. DAO will inevitably have to cooperate with other companies, without a legal entity, how to sign a contract? How to hold intellectual property rights? How to solve the medical insurance problem of contributors?

2. Do all DAOs have legal entities?

Setting up a foundation in the Cayman Islands is a piece of cake for some top DAOs, but what is the reality?

After FWB received a16z's US$10 million investment in October 2021, it found a top law firm and promoted the registration of entities. But to this day, it is still not finished. The latest statement is that efforts are being made to build a UNA (Unincorporated Non-Profit Associate) structure for FWB DAO. In Section IV, the pros and cons of UNA will be introduced.

BanklessDAO does not currently have a legal entity. It was first discussed to establish an LLC, but it has not been advanced. Instead, the subDAOs of BanklessDAO have established legal entities one after another.

Is it because the core contributors of BanklessDAO are inefficient and do nothing with money? It might not be that simple. In the next section, let’s take a look at the new path that BanklessDAO is exploring.

3. Utilize SubDAO to provide financial and legal protection for DAO

This is a new Thinking about it, BanklessDAO’s legal guild is not vegetarian.

0xJustice.eth leads governance efforts at BanklessDAO, and he wrote in May discussing the legal entity of DAOs and subDAOs:

First of all, he denied the conventional practice in the industry, are those legally registered DAOs still DAOs? Members require real names or KYC, and agreements are based on legal contracts rather than smart contracts.

Secondly, a new idea to solve compliance is proposed. How can DAO legally use legal tools? SubDAO may provide the answer. The scheme is as follows:

1>DAO does not require a legal entity;

2>SubDAO creates and operates a legal entity to serve the DAO;

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3>SubDAO signs legal contracts;

4>SubDAO holds physical assets through legal contracts, and DAO does not hold any physical assets;

5> The identities of SubDAO members can be authenticated through "third-party identity service providers", but SubDAO members remain anonymous to the DAO;

6>The biggest problem with this solution is: if SubDAO runs away with physical assets What should I do? This requires on-chain DEFI solutions to assist. For example, physical assets need to be pledged by equivalent digital assets.

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4. Compliance Framework

1>How to ensure "decentralization"?

This may be a bit counterintuitive.

The best structure to support "decentralization": UNA, LCA, LLC;

Because it supports 100% chain, the operation process , without having to deal with any real-world human behavior.

The worst structure to support "decentralization": overseas foundations;

Because of the need for individual operations under the chain, it is actually Controlled by Foundation members, not by DAO members.

A DAO without a legal entity may not guarantee "decentralization";

Hey, here, I see The Mirror DAO dilemma. A technology research and development company (such as Mirror team) initiates a DAO without a legal entity (such as Mirror DAO), and the company's members participate in the activities of the DAO, which will be considered by the regulatory authorities as destroying the "decentralization" of the DAO, thereby bringing legal risk.

2>How to "split profit"?

Everyone holds DAO governance tokens, DYDX, ENS, OP, and always fantasizes about being able to participate in the distribution of profits. Let's see if it's possible.

First of all, DAO without a legal entity holds governance tokens. If it participates in profit distribution, it will challenge the U.S. securities law, and the "governance tokens" and "governance tokens" The definition of "equity"; secondly, if profits are distributed in other ways, the two structures of LCA and LLC are most suitable. UNA has relatively large restrictions; overseas foundations are vulnerable to challenges from tax authorities;

3>How to ensure "legal existence"?

If a DAO has no legal entity, it can have a very high degree of freedom, but it also loses the support of the legal system. The main problem is See the 3 points explained by GitcoinDAO in the first section.

UNA, LCA, LLC, and overseas foundations can all solve the problem of "legality".

4>Why does FWB choose UNA?

From the above points, it seems that UNA has more restrictions than LCA and LLC, so why does FWB choose UNA?

First of all, UNA is very resistant to regulatory review, and the risk is much lower than that of LCA and LLC. Especially for an organization with a large number of people and high income, American supervision is always the sword of Damocles hanging over the head. In order to reduce risk, FWB seems to prefer to forego the direct distribution of profits to members in the future.

Secondly, in the form of UNA, the transfer of DAO membership is easy, while LCA and LLC are restricted. As a social DAO, FWB must consider the potential risks of membership transfer.