3 The Evolving Legal Status of DAOs【DAO TOKYO 2024】

Transcript

thanks a lot for the introduction uh let's get started um why don't we get um start with a brief introduction about yourself or what your company your project is doing uh maybe starting from uh Nick over I mean sorry Adam over here all got EX Adam Miller from maow which stands for Marshall Islands da so I've written the laws in the Marshall Islands which is a country in the South Pacific creating the world's best legal entity for Dows and web 3 it's a dow LLC comes in nonprofit and for-profit options and I'm a big believer in the use of legal entities to help protect Dow members and contributors my name is Nicholas uh I'm one of the co-initiators of Q protocol we provide a governance framework for

web 3 um Q protocol is a DA we have received regulatory clearance in Germany and lonstein about two years ago and um are providing treasury protection um and external governance oversight um hello everybody I'm Anthony CEO of Aragon um Aragon launched the first Dow framework in 2017 2018 um which is helping to secure the assets and Protocols of of many ds around the space including Lio dentaland curve uh and most recently uh polygon announced that they would be governing on Aragon as well um so yeah really happy to be here uh and have a great

chat thank you Anthony I'll just give a very brief self- inro as well hi everybody uh my name is Jim I'm working at borderless do compan which is a project by a Japanese startup called overlay and we're trying to build a platform enabling well at first Japanese groups to launch legally compliant Dows using the legislation that went into effect in April but eventually hope um bridging to International uh other jurisdictions as well and if we have time I I'll explain a bit about the Japanese law but anyway to get started we just had a nice Lively backstage discussion I'll try to highlight some of the uh best moments to share with the group I think um maybe not everybody's familiar with uh the jurisdictions uh

the different jurisdictions that can uh support uh legal entity D for dowas and also maybe why you even need or when you need a legal entity for dowas so I was thinking maybe we could start first with a brief discussion on you know the the when and why do you need a legal rapper when do you need a legal rapper or maybe what are maybe some of the pitfalls of having a legal rapper and I know maybe some of the opinions differ with the different members but I think it would be helpful for the audience to understand some of these insights so maybe we could start with Adam over here yeah so in almost the entire world when a group of people engages in a collective activity uh they are given a default legal treatment by their governments and that legal treatment is

that you can be held personally liable for whatever goes wrong with that uh organization or project right and that means that if you have 50 people in a Discord server working on a project and you get sued or the government comes after you and decides that uh your Dow owes $50 million in a fine for breaking a rule they will literally come after you personally for your money your assets your home right and so that's the biggest reason that people need to consider using legal entities for their Dows is that they provide you with a liability Shield they in the traditional startup world we all know that one of the first things you do when you start a company is you create a legal entity for it for that reason now beyond that it also comes with a tax optimization so

that you're not necessarily personally liable for tax it taxes it allows you to do things like open a bank account for your Dow if you want to interact with web 2 and trafy sign contracts so like if you want to sponsor an event and need to sign a contract you need a legal entity to sign a contract so um all these benefits that you get uh for traditional organizations you also get using a legal entity for a doubt thank you Adam maybe Nicholas you could explain from your perspective sure so I am uh a little more critical of of legal reers for for Dows and uh the the reason being mainly because my idea of a dow is that in in an um world where we have an economy

that is digital that is decentralized that is independent of nation states where you have people from all across the world work in one project um I I think a dow is is a form of organization that we need to establish and and try to understand what it will be for that world that is independent of nation states um also if you you if you think about legal rappers um you you will always just catch like one jurisdiction so you're Dow might like the the Q protocol we have people working in Q in in six continents so if we had a legal rapper

in lonstein where the foundation is you know it's like we would put people all across the world under the laws of lonstein and um and I don't think that's the idea I'm not totally opposed against legal reers because I look at the world of like everything's a tool you know a a DA form of organization is a tool to achieve certain kinds of um organizing people and work if you do need a legal rapper because otherwise you couldn't pay people on the ground uh or like whatever then it's fine but I would be um I would always advise to be really nuanced and um what what we do with Q is

one of the things we do is we provide like a very basic um legal framework for your da where you um can start organizing the internal workings of your Dow and and also liabilities of members of the Dow um and I think that's a good starting point and everything else is then depending on on what you actually need and and want to achieve yeah so you were saying before that you don't you can you can kind of preset these uh definitions of responsibilities and all this stuff at an early stage without act you know in preparation maybe if you want to do legal rapper later you were s or you were yeah so so for me a legal rapper um must serve a

specific purpose because as a starting point I wouldn't see why you would need one you know because there are other ways of I mean we've seen it in in other circumstances International uh trade maritime law like all kinds of specific areas where you reside into private law and private arbitration for example for dispute resolution and whatnot um and and that is a sort of a legal framework and it's it's even acknowledged by most nation states um that way but you don't need legal rapper in whatever country for that matter so yeah I just want wanted to make the point that you know there's

a lot of different kinds of dows maybe adding a legal rapper might you know detract from the decentralized or autonomous you know properties of dows and so it is important to think about when and why you need a legal rapper not just assume like oh it's just you know we def something we definitely have to do and there are a lot of differing opinions on that um an Anthony anything you'd like to add yeah absolutely this is one of the hottest topics you could say when it comes to to Dow creation is in general the lack of clarity around uh legal rappers or the legal aspect of of having a dow obviously it's a tool which Nicholas mentioned which I think is really important for people to understand um and we have hundreds of

dows you could say per month coming in and and this is often a question that they have it's like a it's a fear it's like they have a huge fear around how they're going to set up their Dow do they need a legal rapper for the da itself do they not what kind of legal rapper where and the reality is is that a lot of these projects end up being captured uh into a lot of bureaucracy very early on um in their in their life um by sort of having the wrong legal rapper Going Down The Long uh the wrong legal rout getting the wrong information um and it's really important that they do their due diligence uh and that they work with their lawyers and they work with their

team to decide what they're trying to achieve what are you trying to achieve as a now and then obviously working within within those parameters I mean we have so many so many unanswered questions um every day and and some people believe that the Dow shouldn't have a legal rapper some people do believe that they should some advise that their Dow members legally wrap themselves instead of The Da and and there's so many of these questions and I think the most important thing is to to be honest also with yourself as a project what stage are you at you know do you need to launch a token at this point do you need to launch a fully onchain at this point and then what do you need to do that safely for you and your community members and to achieve your goals um is super important and so

it's it's everybody wants the Silver Bullet do I need a legal rapper where should the legal rapper be and sadly the answer to that question is is it really depends on on your your situation great yeah I hope that that some people found some insight in that um so that kind of leads me into the next question um let's assume you do need a legal rapper um what did I'd like to ask the panel you know uh if they any insight they'd like to provide on you know different F what they think is a favorable legal jurisdiction or non-favorable favorable legal jurisdiction since um Adam here is you know uh promoting Marshall Islands maybe we could start with that yeah so the reason we created the new Dow LLC in the

Marshall Islands is because about two and a half years ago we were looking for a legal rapper for our Dao and uh we looked at literally every available option in the world Swit Cayman Islands BVI Delaware Etc and at the time every legal rapper in the world required you to have a board required you to know the names and addresses of all of your members and had other requirements that to us was not compatible with our vision for our doubt and so that's why we reached out to the government of the Marshall Islands which was a leader in the shipping uh jurisdiction industry already and said hey we want to create a legal rapper that's made for Dow and made for web 3 and so with with this Marshall Islands legal rapper you don't have to have a board or managers of any kind if you don't want to you don't have

to know the names and addresses of your members as long as you have their wallet address tracked by a token or some other smart contract all of your recordkeeping and accounting can be done on chain so there's no need for paper based recordkeeping and accounting there's other uh benefits too we still see like the majority of crypto projects still I'd say the not the majority but the most popular jurisdictions are probably the Cayman Islands often combined with BVI Switzerland Delaware is still really popular if you're a project that's based in one country like a Japanese Focus project or or a a German Focus project you probably want to use a Japanese or a German entity but if you're Global and you are looking at the range of available options still a lot of people are going with Cayman Islands because

it's been used in crypto for so long lawyers are comfortable with it if you can afford the sometimes hundred or $200,000 price tag that's fine um but but again that's why we created the Marshall Islands option and Japan actually followed suit in April passing a a dow law so that Japanese projects do have a an LLC option available here uh but but those are the reasons we like the Marshall Islands if if those particular things are important to you that that were the reasons we created the legal entity there thanks yeah I know from my perspective it's hard to keep track of the latest uh you know movements and all these different jurisdictions personally I didn't know before about the Marshall Islands but it sounds quite favorable um Nicholas I know you were saying that the Q protocol could be used to make Frameworks that

aren't necessarily tied to specific jur dition but could later be applied to many different ones maybe you could elaborate a bit on that for the audience yes so the um the the service we provide or the the idea is that the Dow organizes on the basis of what we would call a constitution the Dow could call it whatever they want to call it and it would be a private contract between all members of the Dow and in that private contract you would not only state like the purpose of the Dow um DEC decision making most importantly um how to change those rules you know it's it's like that is very very important to be able to progress through time and then maybe

towards greater um um decentralization and then an integration um with the ICC Court of arbitration which does the following a it provides a means for dispute resolution for um disputes within the Dow and it's not the only option we um we have but what what that specific option does is whenever there is a dispute within the Dow you have a um framework you have a transparent framework and you can go to the ICC to have a dispute resoluted and because the ICC is being acknowledged by pretty much all relevant jurisdictions in the world

what would happen if somebody sued a member of the Dow um the J would look at the articles of Association or the contract or the Constitution whatever you might uh call it and say like wait a minute you guys have opted into private arbitration we acknowledge this very private arbitration so go beef it out before the IC and then you can come back for enforcement on the ground this is um a a principle that's been around for for ages and had been developed out of international trade and that forms a very basic um beginning of an organization and then at later stages depending on

what you want to do and what you need you can always add to that um and even the legal rapper can be added to to that but you have a good starting point and and you guys actually integrate that IC decision into the base layer of the chain right yes yeah I think that's what's very unique about Q yeah and you could do that an early stage then later later on add the legal you kind of set up these understandings at an early stage in the Dow formation and and even before you're ready to add the legal rapper later it gets you in a better position to to legalize yourself later yes it's it's tooling you know like all of this is just tooling it's it should be used to like when needed for what it is needed and and and there are different ways of doing that this is one

way we we set up our own Dow and uh we can provide others with the same uh abilities and it actually worked so like I mean some of you might have heard of the in famous Uka case um and that was the problem the problem was not that the United States uh like California court I think it was that the judge wanted the Dow to be a partnership and and they that judge didn't have a choice you know a judge needs to tap into the toolbox that is provided to them and had they had um such a private contract with an integration with the ICC that judge would have had an option to say like NOP

go beef it out with the ICC don't come see me you can come back for enforcement because that's what the idea is yeah I love that both of you are dog fooding obviously um you know your Dows your protocols what you're working on with you know distinct legal rappers um I think that's one of the best ways to for us to solve these issues and determine what is a great methodology and set precedent to move forward um I can give some like generalistic trends of what our Dows typically use and see um and it it really spans across the globe to some degree um Switzerland definitely has one of the more longstanding um and most widely used

legal rappers from a nonprofit Foundation Association perspective I would say it's definitely like the higher level of respect in the industry um really large projects typically like to use the Swiss system it's a bit slower moving it's actually not terribly expensive but you need money um then Cayman Islands is also like probably the most adopted right now I'm definitely seeing a lot of dows medium siiz and larger using Cay Islands um it's quite flexible for my understanding can be quite expensive um but it's very favorable from a tax perspective as well which is probably why most of them are there um you know Marshall Islands I'm starting to hear about as well um

actually a project we're working with is is using them and really liked that you could sort of match some of the onchain um components to the legal rapper itself and then most recently um Austria Germany are some other ones I'm hearing about and now it's great that Tokyo um from my understanding they've been speaking with Switzerland are are starting to work on something as well I think the most important thing is that we need Clarity from all of these jurisdictions on what you know and we need more jurisdiction to provide that Clarity um so for example the reason Switzerland is so popular is because you have that Clarity you have stability you know exactly what you're going to get what rules you can play by if you play

Within those rules you're going to be fine right and so that Clarity allows organizations to begin their deification process and do that more efficiently make probably less mistakes out of fear um and so I think that's like the crucial point um so it's great that two projects we have here are diving deeper into not quite as widely known legal rappers so that we can start to get those out there have more Dows work with them and learn and iterate and and and and be more confident and comfortable if if a dow decides to use them thanks for that Anthony I think you also were mentioning some pitfalls to you know some legal things to avoid or um other downsides to legalizing too

soon I don't know if there's anything you just want to insights you want to share with the audience um yeah one of the largest pitfalls I think in the industry is um projects decentralizing improperly too quickly that means launching a token potentially without product Market fit uh launching a token when they're not ready sort of putting legal things aside how they're going to build their Dow aside put those on the back burner launch their token begin this process and not really have an understanding of where they're headed and then often they get caught up in this in in in pretty intense bureaucracy and let's be honest most projects in web 3 are startups and the last thing you need to succeed as a startup that you will fail for sure is way too much

complexity in bureaucracy when you're searching for product Market fit and that's we see a lot a lot of projects do that and then quickly fall into this trap and I can tell you as as somebody who's like you know working directly with lawyers accountants Etc on a daily basis for a large organization it is extremely timec consuming extremely energy intensive when you should be focusing on your users and your product so biggest Pitfall in my opinion in our entire industry is that thanks you want to add something Nicholas no um so I I could not agree more um especially with the with the idea of decentralizing too early having the token too early and there is um like

this fear that or I hear about this a lot that people sound like but I need an organization I need all of these things early on um and I need to be decentralized in order to um get around like regulation or whatever um and I I just wanted to share like for us we received a regulatory clearance two years ago as I said and we were not fully decentralized we still are not fully decentralized we still received clearance because what what what Regulators are looking for and this is not legal advice this is just my personal experience and I've worked in telecoms and and other regulated areas what they're looking for is mainly two

things transparency and decentralization or like can somebody run with the money is is there a a person or a small group of people who can compromise um what whatever business product call you're doing and can run with the money that's what they're looking for if you provide them with um with a transparent framework or like a a way to go um and go more decentralized over time and and you're not pretending to be something you're not I think that's the worst you can do you know to pretend to be very decentralized and then have one guy with an admin key do everything that

is the worst you can do um so rather tell everyone what you're doing and then have a very clear path and very transparent path towards decentralization whenever that is required and and benefits you because decentralization is hard as well you know it's it's not an easy thing to do and I mean I agree with not decentralizing too soon or launching a token too soon but would you guys agree that by the time you're launching a token that's probably the time that you should have legal advice some kind of whether it's it's a legal entity or some kind of legal approach and you should be decentralized because the way Securities laws work in most of the world which are the laws that think most often get in

people's way when they're trying to do a token and not get sued those are the laws that require you to be decentralized in a sense I mean it's done by really restricting you from having a centralized group of people that you're relying on and so what we often see is that by the time someone's ready to launch a token they need to decentralize before they launch it or at least before they sell it and and really give control over the protocol over the organization to as large a group of people as possible with as little management as possible and then launch the token so that then you're not you don't look like there's a centralized group of people well I shouldn't say look like so that you don't have a centralized group of people that a regulator could come after and say people relying relying on you for the

success of that token therefore it's a security therefore you're in trouble yeah I think that's a there's a great distinction there um which is super interesting um a lot of projects start where they launch their token um and they start using offchain voting for example and they sort of put on this display that they're decentralized but then there's this you know multisig in the back that just does everything the reality of that is is that it's not decentralized at all the courts are not going to probably look at that as being decentralized at all so I think the very honest thing that needs to be said there is that you are signaling you are getting signals from your community to make decisions and that it's non-binding whether or not Not Your da

at that point is another question or argument we can go into of course but um but but yeah that's super important to note uh and I think the problem is is projects are launching tokens really early often way too early they want to try and capture they think this is going to help them generate uh have a larger treasury generate more users by having a token the reality is that I I I do personally believe that you really want to have a pretty strong signals of product Market fit before you launch your token and if you do that you probably can go and be decentralized upon token launch much more quickly and you should definitely go speak and get legal advice before you launch your token no question and then make your decisions after you do all your research

but I think that distinction is really really important if you're using offchain voting and you have a multisig in the background you are not decentralized that multisig is centralized and is what will take on 100% of that risk and you need to be very careful of that um and I think that's a big Pitfall of dows and my my preference would actually be probably that they continue to try and get product Market fit because most are protocol Dows or or or product related Dows not all but but most and for those ones get product Market fit first if you're not getting product Market fit um without a token you're not going to get it with a token so um really important to note yeah maybe adding to to that like two two quick things one um out of our

experience the the very last question both Regulators asked us before we received regulatory clearance was do you have any admin keys or multisig in your in your system in your protocol how do you do code upgrades and only after we could show them how we do these things without any admin Keys we've received regulatory clearance so that speaks exactly to what you said you you do have admin Keys you are centralized um absolutely the second thing is a word of caution um and again not legal advice but in the jurisdictions I was trained as a

lawyer it does not matter whether you are decentralized or not if you're selling a security or what's deemed to be a security Securities Law apply so be very careful because there is this idea in the space that by by forming a DA you can get out of Securities Law regulation and to my understanding this is not true or at least not necessarily true because even if the token would not be considered a security if you advertise it as a security or something that is like a security then regulation will hit you for advertising it so I think that's

what you meant with like a silver bullet be very careful with these Silver Bullet ideas more often they're not they're not true there are no silver bullets in these kind of things yeah I mean to me it's it's one of the factors and I I most commonly look at us Securities laws where there's like four factors and being decentralized helps you avoid right one of those factors to the point about multi- so I want to share a thought on that on that point because if you look at for example Dow base. which is one of my favorite tools for looking at uh statistics about Dows um is uh like 95% of the 200,000 Dows out there CU I agree we can debate whether they're really

Dows or not it's an interesting conversation for another time um they're all on Snapshot they're doing offchain cryptographic voting combined with a multi now one cool thing you can do is you can use a legal rapper or any legal form or I think Q in some novel ways to actually enforce that those multi-sig signers must act in accordance with the outcome of the votes and so in that case it it it creates a different uh a different set of considerations where maybe those people are really not in charge because they're they're just kind of utility players that have to do what the Dow wishes and so now you I think you can have something that a bit more like a dow and a a little bit less risk of having a multi combined with something like a snapshot wow yeah no those were some

amazing insights thank you all for sharing I guess we have about a minute left and I would feel a bit remiss if I didn't at least plug a bit the Japan law that came into effect in April and uh basically I I have a blog post about this which I'll share in the in the you know chat room for this event but um you know Japan has been having some nice Progressive uh legislation recently such as passing a six-month digital Nomad working Visa as well as this new Japan uh you know Dow LLC framework and um at borderless we're actually trying to build a platform to enable well initially targeting Japan to enable like a group to start a legal framework at an early stage to basically reduce the friction of operating the company including um fundraising and in this

case it's more like digitizing the members of the LLC where they all can you know buy these Equity tokens in a legally compliant way um so a little bit maybe it's not quite a dow in the true sense but it does enable um we're hoping it'll enable groups to um to more easily fund raise and then uh operate you know governance and so on their companies than doing it the traditional way and so any right now unfortunately the members of the Dow which are buying the equity tokens all have to be uh living in Japan with with Japanese addresses so it's not as you know it's not a fit for all great International groups but you know that may change in the future and I encourage uh anybody interested to maybe check it out again I'll share uh an English blog

post has a little more info about that but anyway thank we had such great panelists today I think they shared a lot of very valuable insights hopefully you guys all learned something so please um thank you again for your attention and um let's give a round of applause to the panelists thank you very much Ias [Applause]