How does the DAO respond to US regulatory sanctions? DAO's legal structure and corresponding responsibilities

Chao

22-09-26 16:39

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Original title: "The legal structure of DAO – from the US CFTC's lawsuit against DAO"

Original author: DAO lover @cwweb3

Ooki DAO has been sued recently, and the members who voted in the DAO may need to share the responsibility. This situation is shocking, but it has long been expected by many legal professionals. DAOs are not extrajudicial places, and disembodied DAOs pose significant risks to members when legal liability arises. A large number of DAOs are seeking to form a more mature legal structure. According to different business characteristics, limited liability companies, foundations, unincorporated non-profit associations, and special purpose trusts are common choices.

Pt.1

The U.S. Commodity Futures Trading Commission (CFTC) announced on the 23rd Enforcement action against DeFi protocol bZx. The CFTC accused it of illegally providing leverage and margin futures trading; engaging in activities that only registered futures commission merchants (FCMs) can carry out, and failing to implement KYC and other financial regulatory requirements. As a result, the CFTC filed a lawsuit against bZeroX, LLC and the two founders of the bZx protocol and proposed a settlement penalty of $250,000 for each party.

CFTC also decided to civilly prosecute the DAO behind bZx, because the bZx team had handed over protocol control to the bZx DAO on August 23 last year (later renamed Ooki DAO) to evade supervision, and once advocated in the community that this can evade supervision. The purpose of the lawsuit includes demandingcompensation, return of illegal gains, civil penalties, prohibition of trading and registration, and prohibition of other violations of CEA and CFTC regulatory regulations.

This action has been criticized by many Web3 people, even within the CFTC, opinions are not unified, CFTC Commissioner Summer K. Mersinger also expressed this The practice raised public objections and published the opinions on the CFTC official website. The general idea is that law enforcement agencies are wading into uncharted legal territory in their actions against the DAO and its members, a decision that lacks a clear legal basis and was not widely consulted.

Whether bZx violates the regulations and how it violates the regulations will not be discussed too much in this article. We focus on the DAO's legal structure and corresponding responsibilities.

This CFTC action has caused quite a shock in the DAO field, the main reason is the DAO behind the bZx protocol Members may need to bear legal responsibility directly, how to define whether they are members or not, the temporary standard is whether they have voted in DAO, because voting representatives exert influence on the operation of the organization. Although it seems a bit outrageous, in the past, countless legal people have suggested, warned, and expected that this kind of thing will happen, namely-If a DAO has no legal entity, it may be held liable when it needs to be held As a general partnership, all DAO members need to bear unlimited joint and several liabilities. This is one of the most important reasons why various DAOs are currently actively promoting entity registration.

Although most people knew about this risk before, almost no one thought that DAO members would be held jointly liable. On the one hand, most community-type DAOs don’t even have basic business yet. They think there is no risk, so naturally they don’t have a particularly urgent sense of risk. On the other hand, it is extremely difficult to actually punish DAO members. Members of most DAOs are anonymous and have only one address. How to track, how to track, how high is the cost of law enforcement? Unless the FBI is involved, who would spend a lot of energy chasing tens of thousands of anonymous addresses all over the world for a small fine? Even for addresses that have only followed up votes, generally speaking, several proposals are collected, and there are hundreds of them. Everyone believes that the law does not blame the public, and they all feel that they are upright and not afraid of the shadow.

Although this incident set a very dangerous precedent, I personally judge that the probability of this time is that there is a high probability of thunder and rain. Nothing comes out. The main purpose is to deter the operators of the DeFi protocol. Don’t think that you can evade responsibility by handing over the operation authority to DAO. Don’t rush to take the blame in the community. The CFTC also mentioned this in its statement, "These actions are part of the CFTC's broader efforts to protect U.S. customers in the rapidly evolving decentralized financial environment."

< p>This incident made everyone see a fact more clearly. Under the current legal system, DAO needs and will be required to bear corresponding legal responsibilities.

So for DAO, it is almost necessary to form a more complete organizational legal structure at the right time (the sooner the better). (Of course, there must be some DAOs that pursue authentic crypto natives, do not accept supervision, and achieve anti-censorship through various designs. Such DAOs will definitely exist in the encrypted world for a long time, but probably not It is the mainstream form)

Review the disadvantages of not registering entities. If you are not paying attention to this direction for the first time, you have probably seen similar There are three main points:

1. The non-physical DAO may potentially be recognized as a general partnership, and members may need to bear unlimited joint and several liabilities under certain circumstances . This is exactly what is happening with bZx right now.

2. Tax risk, in the case of no entity, members will need to bear the tax liability that does not belong to them under certain circumstances, even if the individual has a penny Not received.

3. Activities in the off-chain world are limited, and sometimes it is difficult to interact with entities in the traditional world without entities, such as signing contracts. And a large number of DAO's business has already gone out of the chain and entered the off-chain world.

Any of the above issues will have a major impact on the long-term development of DAO.

Pt2.

So if you want to register, where and what type of registration?

The following lists common plans for your reference

Limited Liability Company ;(LLC)

In the US, a DAO can be incorporated as a Limited Liability Company (LLC), making it fully compliant with US law and subsequent taxation. In the United States, limited liability companies can be managed by members without the need for a board of directors, managers or leaders. This feature makes LLCs very convenient for use by DAOs. Delaware, Wyoming and other states have clearly accepted the organization registration LLC in the form of DAO.

LLC can be for the purpose of profit, and those who choose to register LLC are mostly investing in DAO. Although there are no clear regulations, most of them require members to be qualified investors and limit the number of members to 99. In this way, compliance can be ensured to the greatest extent even in the face of future regulation.

There are also some investment groups registering LLC but defining themselves as investment clubs (Investment Club). It can be considered as a low profile version of Venture DAO. This name is not a joke. The SEC has clear regulations on what kind of team is considered an investment club. If an investment collective meets the conditions of an investment club, it is not subject to SEC supervision. But there are gains and losses in everything, and the investment club also has a ceiling requirement of 99 people, and the most troublesome requirement is that all members must actively participate in every investment decision. Even if there is only a certain member who does not participate in a certain investment matter, it may be deemed a violation by the SEC.

Recently, another organization has proposed the concept of sDAO, which will allow the upper limit of members to be raised to 499 under the premise of compliance Investment, but all participants are required to be American citizens. In contrast, LLC has no nationality restrictions on members. At present, this plan is still in the process of being verified, and there are not many details for the time being.

At the beginning of this year, the Marshall Islands revised the "Non-profit Entity Law", and any DAO can be registered in the country as a non-profit limited liability company to operate and enjoy taxation exempt. The law allows registration where a single person is responsible for the entire DAO. This is the offshore version of a US structure, but is not subject to US federal law. Although the Marshall version of the LLC can normally carry out business operations, it is not allowed to distribute income or profits to DAO members, and it does not apply to investment-type DAOs.

Overseas Foundation

Compared with DAO registered as a limited liability company, currently choose to There are many more registered foundations in different locations around the world. The benefit of a foundation is that it can be "ownerless", which reduces the legal liability of the founding team if something unexpected happens. Onshore Foundation's popular locations are Switzerland and Singapore. They offer great legal protections, but DAOs need to pay taxes on their income. Offshore is mostly registered in Cayman, BVI and other places. Among them, Cayman is more friendly to token issuance, which is also the choice of quite a few DAOs. The main difference between Onshore and offshore is that offshore has tax exemption. The foundation is governed by a council or board of directors, which sacrifices some level of decentralization, although token holders can vote to guide the council or board of directors in action. The foundation has been widely used by blockchain-related organizations before DAO became popular, and everyone is relatively familiar with this model.

Limited Cooperative Association (LCA)

LCA is a traditional cooperative and limited liability company (LLC ), offering greater flexibility than traditional cooperatives, especially in terms of investment. LCA can make a good structure of DAO's governance agreement and association charter, accept the voting governance rights of different types of participants, and abide by the principle of cooperation. Colorado has a correspondingly comprehensive set of laws for LCA, which has been recognized by many DAOs.

Unincorporated Nonprofit Association (UNA, Unincorporated Nonprofit Association)

UNA is a nearly This year, everyone will focus on exploring new forms. UNA allows very flexible identification of members, allows members to be anonymous, and allows convenient mobility. These features can be well adapted to existing community DAOs. A UNA can run a for-profit business, but the entire organization needs to remain non-profit as there can be no distribution of profits. But UNA is a relatively new practice, and the current understanding of UNA is not the same in every state in the United States. There is a lack of corresponding precedents, which may cause UNA to be unrecognized in certain circumstances and cause risks, In addition, UNA is more suitable for DAO whose main personnel and business activities rely on the United States, and the organization needs to pay taxes in the United States.

Special purpose trust

The form of special purpose trust is generally DAO Transfer some or all of the assets to the trustee, and entrust the trustee to carry out business activities through the trust agreement. This not only solves the problem of offline entities, but also allows DAO members and trustees to be protected by limited liability. One of the main problems with introducing legal structures into DAOs is that adhering to norms designed for traditional organizations could compromise the DAO's decentralization and freedom. In particular, most legal structures require government approval to complete. A special purpose trust formed under Guernsey law eliminates this problem. It requires no government approval and no maintenance reporting. The trust becomes effective when assets are transferred according to the trust agreement. However, the application scenario of special purpose trust is mainly to represent the committee in DAO or SubDAO to carry out specific business, and packaging the entire DAO as a trust structure has yet to be explored.

All of the solutions discussed above address the first three questions. But on this basis, each has its own characteristics. The actual design of DAO's legal structure is often complex. Factors that need to be considered include the country and region where the main participating members are located, the desired governance structure, the degree of decentralization, the main business direction, the size of the DAO's members and the continuous security, Token policy, SubDAO policy, registration cost, etc.

The legal structure and related practices of DAO are very new fields, and there is no general consensus and best practice yet, which needs to be further explored.