A couple of days ago, DeXe’s DAO Talk had two interesting guests discussing an issue that may not be the “sexiest” in crypto but is certainly important — legal strategies. DAOs specifically benefit from adding a legal wrapper to their on-chain governance. How? Why? Where?
To answer those questions, DeXe invited a crypto-native legal expert, Irina Heaver, as well as a DeXe DAO member, Taras Zharun, who recently submitted a legal strategy proposal in the DeXe DAO forum. You can listen to a recording of their conversation here.
The guests discussed the proposal, legal considerations for DAOs, and the reason DAOs need and benefit from a strong and reputable off-chain legal structure. Below are some of the thematic highlights of that discussion.
Does a DAO even need a legal wrapper?
Taking into account recent negative regulatory tendencies, each project needs a legal strategy. Without a legal wrapper, a DAO could be deemed as a general partnership, where each member of the DAO is liable for the actions of the DAO and could be brought to court. A legal wrapper gives the limitation of liability to DAO members. The legal wrapper acts as a single point of contact with the authorities and any other third party (Financial advisors, service providers, financial institutions, etc.).
What protection could it provide?
A legal framework in a reputable (especially Tier 1 type of jurisdiction) not only gives liability protection, but can serve to vet the reputation of the DAO, give it some buffer against being attacked by bad actors in the space, serve to assure counterparties that any dealings with the DAO will be legally enforced (thus, minimizing the potential for others to try to defraud the DAO and maximizing their trust that the DAO will live up to its own obligations).
Even for a regular DAO member, how can one feel safe and secure joining a DAO if he is worried about being held liable for something someone else in the DAO does? A clear legal structure that protects individual members from liability and gives a solid legal framework to a DAO is likely to help calm the nerves of potential DAO members about joining the DAO.
Could it be abused?
Anything is possible, but it’s important to keep in mind that Switzerland has a serious registration process, which is part of what makes a Swiss Association much more reputable than off-shore legal entities, for example.
Unfortunately, there are a lot of haters claiming that crypto is all about money laundering (which has been thoroughly debunked, unlike the use of cash for those types of crimes). Establishing legal structures in reputable Tier 1 jurisdictions like Switzerland actually gives DAOs even more credibility and shows the haters that DAOs are a fully legitimate and legal form of organizing.
Why a Swiss Association?
Switzerland is the most reputable jurisdiction, so it carries a reputational benefit as well as a crypto-friendly environment (Switzerland has many crypto banks and transparent processes).
Some of the top crypto projects (Ethereum, Cardano, Polkadot, Aave, Cosmos, Solana, Tezos, Dfinity, Near, Nexo, and Diem) have legal structures based in Switzerland, which is both testimony to Switzerland’s reputation and a networking opportunity for any new DAOs basing their off-chain legal wrapper there.
Foundation vs. Association
Swiss Association as the legal form is very flexible and provides the DeXe community the opportunity to establish a truly decentralized governance model, where any step of the Association will be controlled by the community and these powers of the community could be officially incorporated in the constitutional documents of the legal entity. In essence, an Association parallels the decentralized and autonomous governance of the DAO. Meanwhile, Foundations are far less flexible and were prone to abuse.
How does the proposed legal governance model work?
It’s like a parliament and a cabinet of ministers, where the parliament (in our case — the DAO) makes the legally binding decisions and the cabinet of ministers (in our case — DAO legal wrapper) acts in the framework of this decision. The legal wrapper is liable to the parliament in the case of a breach of any of the DAO’s decisions. Thus, the collective DAO is legally protected and is legally in full control of its decisions.
How does such an execution of DAO decisions work in practice?
For example, the DAO could make the decision to allocate $100,000 to some project in the form of a grant. The Swiss Association will make a legally binding agreement with the relevant project and, in case this project breached this agreement, the Swiss Association will terminate this agreement and seek damages in court. This crucial instrument is not, unfortunately, available in the on-chain world.
The Association can create legally-binding agreements with service providers, advisers, and many other types of counterparties. It can even be used to satisfy legal requirements when applying for various governmental grants.
How will the Association be managed?
The Association’s Council members are to be elected and dismissed by the DAO voting. They will act on behalf of the Association in relations with third parties, sign the documents, and make fillings with the authorities.
It is a legal rule in Switzerland that management must act in the best interest of the legal entity, in our case — the Association. In case of breach of this obligation, they could be dismissed by the DAO and legally liable in court. No assets could be transferred from the DAO treasury without the decision of the DAO; no major agreement should be made without the decision of the DAO.
The Council members will be paid by the DAO but only a nominal amount in order to discourage any temptation for corruption.
Is there a definitive recommendation for a legal strategy and jurisdiction?
No. Switzerland and its Association structure come highly recommended. But each DAO should evaluate their specific situation and decide on their own path. That being said, since DeXe will have a DAO constructor, it should serve as a model for other DAOs. Choosing a Swiss Association as its legal wrapper signals to other DAOs that DeXe stands for strong, reputable legal structures.