All Wrapped Up Unpacking the DAO Wrapper Delusion - Anne-Grace Kleczewski

Transcript

[Music] [Applause] Hello, thanks for the warm welcome. Um, we we've heard a lot of great ideas throughout the day, throughout the conference in general. Uh, people are dreamers. They want to build new things. But then the legal reality kicks in and the last thing you want is your dream to become a nightmare just because a lawyer tells you this will backfire. And in many cases, these projects um that we hear about have a community. And there was this whole trend of rapping communities. And there's like a lot of advantages to that that we've heard about. But what if actually wrapping in some cases may be a problem? This is the topic of this presentation is um it's

aimed at giving you some practical insights on what to think about when you choose a rapper. How do you choose amongst those many jurisdictions? When you choose a TV, you don't want to buy the first one that the seller recommends to you. It's the same with a rapper. You don't want to buy and give in to the first rapper that you are being suggested by any lawyer that you came across at a conference. So, all wrapped up on packing the D rapper delusion. Um, I was introduced uh I'm a lawyer in Switzerland, but this is jurisdiction agnostic. I will mention plenty of jurisdictions and the questions I suggest that you should ask yourself when considering the topic are valid anywhere in the world.

Now the first thing is if my slides want to work properly. So why is wrapping a challenge? Organizations exist since decades like even longer. Like the concept of an organization is not something new. We can all sit around a table decide to organize oursel and manage a box of chocolates for example and then some people can buy into this box of chocolate can decide who can eat them and so on. So this is nothing new and all these organizations can be always wrapped into a legal entity if you want to have some legal certainty. It's not a new thing. I decide tomorrow to create an association that is named the chocolate association and we all manage this box of chocolates together. Now Dows are decentralized autonomous

organizations meaning this is not something new. Why does it become an issue when it comes to Dows to wrap them if all other organizations do it anyways? Now so arriving challenge is it because of the horizontal aspect of the hierarchy endows because everyone has a say we don't want to have a board that's a bit more important than other people we want to evolve is stake all stakeholders well it could be the reason but actually it's probably not the reason because there are some types of organizations that take this into account you have associations you have cooperatives you have simple partnerships that don't have legal um personality but have other advantages So and anyways on the other hand you realize that Dows do have some sort of

hierarchy that is not fully horizontal at the end. This ideal of a DA where everyone has a say on everything without any structure. We're slowly drifting away from it for very practical reasons. So probably this is not the main reason. Is it because we use tokens as proof of membership? Also probably not the right reason because those tokens the principles are kind of the same as we had shares or any other type of memberships. And on top of that, we realize nowadays that you can tokenize shares. So this is not the major uh blocker here. Would it be because of the size because Dows are so much bigger?

Well, probably also not the reason because we have public uh companies that are listed with a lot of shareholders like anyone can become a shareholder at the annually. So the size is probably also not the issue here. Now is it because they're autonomous as their name suggests? Well, it could be, but let's face it, not many Dows are actually autonomous in practice. So, probably this is not the reason either. But could it be synonymity? And this is actually the crooks in this case for Dowos. People use nicknames. You don't want to display who you are, where you live. For all other type of organizations, we're used to signing up on a list. When you apply for an association, you say who you are, where you come from, and this kind of things.

You apply with a name. For dials, you just buy a token and you hope that no one will know exactly who you are. The second issue is that you have administrative burdens with entities. You don't like once you set up this entity, you need to fill in taxes, you need to do some things. And this is also not something that Dows really want to do because at the end of the day, wrapping is not um let's say compatible with the idea of playing around. And you'll see a lot of cats in my presentation today. There are two reasons. First of all, I want to keep you awake and everyone loves cats. Second is the very first time I showed up in Prague for a conference, there was a cat in the audience and every time there was an image of a cat. The cat was

meowing. So now it became a tradition. I cannot show up in Prague without the cats. So rapping is not compatible with playing around as any cat would do because I mean Dows often act as informal sandboxes in practice. It's just a bunch of people who gather around Discord a chat on Telegram or anything else and they try out something. They don't know yet where it will go. They will figure out governance. It's like an experiment. It's innovation and testing spaces. It's easy to discontinue. You want to just be able to say, "Okay, this project doesn't work out. We stop it here." And also, you want to establish frameworks only once you have figured out what you're actually doing. With a wrapper, things don't work that way. So, wrapping solution, there are two

options. The first one is if it fits, it sits. So, that's the cat option of you fit into any of the existing boxes and you just figure it out. Or that's the other option. If there's no fitted solution, we're just going to create a tailor-made one for you. And that's the option of buying this beautiful cat bed that the cat will anyways abandon at the end. Now, if you look at the first like the second solution, this tailor made option, there was a lot of initiatives like that where we wanted to attract dows in some jurisdictions by creating um specific type of entity that even had the DAO name in its uh in its name. So you have the Delo LLC in Wyoming, Tennessee. You have the blockchain beds LLC in Vermont, the Duna, the unregistered, the decentralized

unregistered um association also in Wyoming, the legal DAO in Delaware, the also the Mi Dow, so the Marshall Islands DAO, the DAO association and now in UI indirect free zone since this year. So the first one started in 2018. 2022 was the year where free other ones popped up and you probably have more of them. I have not listed all of the options here, but this is like the tailor made option. We attract Dows by using the word DAO in the name of the entity type itself. Now you see that people really serve the wave. You had articles already back in 2019, we had the first legally valid DAO under US law. Wow, this is awesome. So it's a bit of a marketing trend, but when you think about it that there's no

DAO on a certificate, it's not because you incorporate a DAO LLC that you're actually a DAO in the sense of decentralization. What do I mean by that? Well, because you use the formal DAO setup, it doesn't mean that you are decentralized from a regulatory perspective. So, no DAO uh act is recognizing Dows for corporate purposes with decentralization requirements. When you read through those acts, it's pretty funny when you see that is a DAO any entity that incorporates and names itself as a DAO LLC. So, basically the consequence is that tomorrow I can just take two friends along, create a DAO LLC, and that's it.

I would meet most of the requirements. No one is asking me whether I'm actually decentralized as the regulator uh takes into account for example when it comes to financial regulations or other aspects. It's not because you create the those rappers that you are immune from being not considered a DAO by other um authorities. And it's it kind of mimics what happens in real life. And I mean the most as a lawyer the first thing I think about is someone tells me that they're a freelancer but in practice they act as an employee. It's not because they have a freelancer contract that some other authority will not tell them. Well actually we will treat you as an employee but because in practice you are one. Here it's the same. You show me your DAO LLC certificate. Well I'll tell you you're not a DAO because there are

two people deciding for everything. For example now the other type of solutions was just to fit into existing boxes. And this is what we often suggest at least in Switzerland because we have some boxes that are pretty convenient and we can adjust to any type of cat. So it's great we had the association. We can also work around the cooperative. This is less popular but there were some initiatives of just using the cooperative model and you have the foundation that's like the heavier option and we can perfectly work around that. So, a wrapping solution, there are the same shortcomings when you think about it on both sides. Whether you choose one of those tailor made boxes or you take those pre-existing boxes that kind of seem old school and you need to uh fit uh with the DAO, you still have

the same shortcomings. So, why ignore the red lights? And this is where the interesting parts for you kicks in. Like what are the questions you're supposed to ask yourself when you see there's so so much choice what to do? Well, first of all, you will realize rapping is not a da panacea because you rap yourself that you're going to solve all the issues. But I think this was pretty clear already from how I presented things until now. So the rapping decision to rap or not to rap very Shakespeare style. Um sometimes it's better to abstain to rap. The first question is not to ask yourself, do I rap? Is my it's rather is my activity regulated? Why is it important? Because once you rap, you create an access. you choose a jurisdiction which means that the regulations applicable there will

for sure be applicable to you. One of the things that we often point out from a legal perspective is that by not choosing a jurisdiction, you just open yourself to being um subject to any law out there. Any regulator could come after you and tell you, well, I consider you have a nexus here, so I I will just sue you because you don't comply with my laws. By wrapping is a very good thing because you select the nexus you want but you need to make sure that that nexus makes sense in your case and even offshore we have vasp regulations in most jurisdictions now and it was very interesting because like I did this tour of a lot of offshore jurisdictions and it turned out that although they sound exotic they sometimes have pretty restrictive requirements in terms of

vast laws where you just fall under those regulations and need to comply for example with AML requirements. Who in the crypto space with a DAO wants to apply KYC checks? No one. So probably this is one of the things to verify in advance. And instead of just paying for a package to set up the wrapper, you may want to also analyze the context in which the wrapper will exist and make sure that what you're wrapping is not creating an access for a regulated activity for which you don't comply with the regulations. Now the other question is do you want to truly rep or you want to create an agent for exe for executing things that the DAO decided? Do you want to have like this entity that's on the side to which you signal for something

um that you want to execute specific actions like this cat sending the paper plane like hey I'm sending you a paper plane please grant uh money to these projects because we want to fund them or do you want to really rapid and be have this setup where once the DAO decides the same entity is further uh executing and it all depends on how genuinely decentralized the core team or whoever has this movement of creating the rapper is. In some cases, you'll hear founders um tell their lawyer that basically they want to retain some control of things because it's their baby after all. In other cases, you really have this project that came from the ground uh from a group. It was like a collective initiative and in this cases often they

want to make this rapper as decentralized as possible because it's part of their ATOS. So, it's a very good filtering method to see which Dows are genuine Dows from the beginning and which ones are like kind of trying to fit into a decentralization trend. Now, the other wrapping decision is do you want to wrap it all of it like the whole bag of apples or do you want to just wrap one apple or a couple of them? What does it mean? Well, you want to know who decides on what. Do you want to wrap all activities, for example, all of the unregulated activities because it makes sense or you realize that one of the activities is regulated. So you nevertheless want to wrap it because you know that in this jurisdiction you

managed to fit into an exemption. So it makes sense. You can say the DAO handles this task. It should be regulated elsewhere, but here we fit into an exemption. So it's it's all good. So how do you want to structure that? Do you say the DAO decides on everything or just part of the things? Um, and where do I find the scope at the end? How do I define it? Because often it's unclear who like do you need a DAO vote on the DAO telling itself what it will decide on? In most cases, it will be like a core team deciding what goes where. So where do I find also the coordination between the wrapped and unwrapped parts? This is something to be taken into account as well. Like how do these activities cooperate together? And this means that basically before you

even reach out to a lawyer or any other service provider to figure out a rapper, you just need to have this mental diagram of what are the activities we have, which ones are part of the DAO, which one are maybe part of another Dow that is interacting and what are the interactions. So you need to do some modeling work in advance which is not necessarily legal work to start with, but just to have an outline of what is happening. Now, the wrapping decision, well, the red flags are a bit like who is actually legitimate to reach out to a service provider and ask for a rapper. And it's funny here, I put a quote from um the Marshall Islands statute uh for the MIDI dowo where you don't even need to be a member of the organization to apply to create uh a DAO

in the Marshall Islands. So, it just makes me wonder in practice. I'm not an expert on Marshall Islands, but the first thing I think about is could I just decide that tomorrow I want to create a DAO for a random project that I'm not even affiliated to. Will the commercial register just ask me, hey, are is there a DAO votes confirming that? I can hardly imagine a commercial register thinking about asking for a screenshot from snapshot. So, how does that work? How do we avoid abuses? So this is what I just mentioned before, but there's also this idea of um how do we make sure it reflects what the DAO actually wants. How many people voted like how did we select the the setup?

And here I have put two examples. I've came across this SSV network and code that's a bit more recent. Um it's just three months ago. Someone just posted it out there. What if the proposal goes on notice and you just have like a handful as most of the time of people voting? How do you have transparency? How do you know that this proposal makes sense for Kao? I spent some time just diving into the comments. Most of the comments were uh great, we're getting legal certainty, but people did not even notice some of the potential shortcomings of the setup that's being suggested. And I will come back to this uh on another slide. So the other aspect is also just rapid transparency. Once the proposal is out there, you know it's accepted. But how do you get to see the formal documents

that were um adopted at the end? Where do you see this? How do I find it? Often it's not on the same website. Sometimes you have it on a separate website for the foundation which there are legal reasons for that, but there's no connection even. So when you join the DAO, how do you know whether it's wrapped or unwrapped? How do you know what are the consequences for you? And for the Marshall Islands, you have a registry. That's great, but it's only one jurisdiction. Then you're supposed to know where the DAO decided to go. We don't have like a full register of all rappers. It would be utopia. Like even for companies, we don't have like a global register of all companies.

They're only private initiatives. But this would help a lot because otherwise you just don't know what you're interacting with unless you maybe scroll through all the proposals to figure out whether one of them um concerns a potential rapper. Another thing is rapper transparency. we we kind of select what is being displayed there. So for Marshall Islands, you have a registry extract which seems great, right? You see the name, the address and this kind of things, but how do you know who has signatory powers? How do you know who is the agent that's interacting? I mean, the agent in Marshall Islands is really just the person for administrative purposes, but you may want to know who is this person that you're supposed to reach out for for administrative purposes. This is not on that uh extract of the registry. Um, also how do you

know if members are officially taking the power in the entity? Well, how do you you don't know who are the members? You don't even know how many members they are. And this is relevant often before joining because you want to know whether you're joining a DAO with maybe five members being actually somehow a fake DA to a certain extent or a very active one where you have thousands of members. Proof of humanity is not used that often when you look at it. Most of the people just like use snapshot random things. It's like how many tokens you have great you can vote but as we all know we could have 10 wallets with I don't know how many tokens and we just vote with all of them and at the end we are the ones controlling most of the voting process. Um so also access to

rapper related documentation how do I access it how do I know what's happening out there I mean there should be transparency since we consider those organizations are mostly acting on chain there's transparency but for all this part of the rapper related topics there's barely any transparency which is a major problem so decision implementation that's the other part once I have that wrapper what happens when we take a decision well ideally the wrapper should be mirroring ing the DA and not deforming it. So if I look in the mirror as a cat, I see exactly the same cat. This was the DAO we had on chain with the voting the governance and the legal rapper is mirroring the setup we had. We should have coordination between the DAO organizational framework and the organizational framework that's

stemming from all the legal requirements related to the DAO. Now here um there was a very nice presentation earlier about the cell ecosystem and how it operates between like the found you have the foundation the regional hubs the local nodes you have those dows subdows at the end and how do they coordinate and the question I have for the two guys presenting is like what is the coordination there and it was very interesting to hear that you have on one hand this cell foundation that's often presented as the rapper basically for the cical system but it doesn't take in its um it's not part of its scope to also cover for example uh cell Africa or cell Europe or like all the subnational like local uh initiatives all of them

have or do not have their own rappers depending on the level of um development which is very interesting because then the question arises how do you make sure that all of it is coordinated and that there is like a communication that's not just informal. Why is this relevant? because if something goes wrong, you may want to go against another party, have some remedies. And of course, we have this dream of like having everything in an alternative system. Uh you may want to use Claros or other initiatives, but let's face it, at the end of the day, it's nice to just rely on the traditional tools. And one concrete example that's part of another ecosystem is if the DAO gives out grants and the grantees never deliver, well, who has

legal standing? It seems a very like basic question but surprisingly huge amounts are handed out without any potential remedy if things go wrong just because we left Dows unwrapped or like without even taking this point into account when we were setting up the grand system. So decision implementation you have on one side DAO decisions which need to be figured out and then you have the wrapper inherent decisions. What do I mean by DO decisions? Is it operations? Do I hand out grants? Do I upgrade the protocol? uh do I hire someone to do some research and this kind of things? Do I uh co-sponsor a specific event or conference? You want to figure out the process. Is it onchain, offchain? What is the leeway left for the executant? Is it like fully

uh executed by a multisig on chain? So, it's quite easy to supervise or is it something that requires off-chain real life interactions that are a bit harder to monitor? What is the possibility of refusing execution? I'll show an example right after. You would imagine that if the DAO decides the person executes not necessarily depending on the rapper what are the control mechanisms how can I block someone from executing poorly what we decided what are the remedies if they fail to execute now the rapper in decisions is um rather everything that's related really to the existence of the rapper who is submitting um audits who is doing the financials paying taxes how can I make sure that they don't pay for things that are excessive are not

abusing funds Do I have control mechanisms? So you really need to coordinate both uh frameworks and make sure that it's like a comprehensive um package. Now when we mention uh possibilities to go against trappers and people in charge, the arrogant DAO case where the DAO expressed dissatisfaction with the association's move to do something without even reaching out to the community. That's one of the questions. How do you make sure in the setup that you're looking at that the entity you're creating as a rapper doesn't have people who will just do something without even reaching out to you? And if it happens, what are your options as a DAO? This is something to be figured out or asked if you don't understand the documents

suggested to you. Just ask the lawyer, okay, so what happens if I don't agree? Do I have a say? Don't I have a say? How can it uh work out? And the other decision is um part of the code is missing but um this comes from the cow proposal. There was this. So to start uh the first sentence seems great, right? Um the Dow resolutions uh will be carried. So the actions will be carried out by the directors. Everything seems nice. But then you read the second part of it and you realize that directors can determine in their soul and absolute discretion in consultation with a supervisor of course but still it's just a supervisor of the whole DAO that they will not execute something if they consider that this is unreasonable, unachievable or is not in the best

interest of the company or the DAO. Now, this still leaves quite a lot of leeway and what do you do there? Because they will need to um specify the reasons for their refusal. But great, they refuse to execute a decision. What if it was super important for the DAO? What can the DAO do? So, creating a wrapper is also a commitment. And this is the the fun part because like a lot of people say it should be so easy to set up a wrapper, but if it's too easy, people tend to forget about it because as I mentioned before, you have accounting, reporting, taxes. The question is who handles that? who pays for it? How do we make sure it's done correctly? So many quick fix dialers get forgotten. What do I mean by that? It's a bit like with every sit in the box and they're like, "Yeah, I'm

tired of it. I'm just going to walk away." When you look at the register um in Wyoming and you just type in DAO LLC's, you see about 1,189 occurrences of the word. So, a lot of people created DAO LLC's in Wyoming. But then when you check the list, this is only on page two. You see one, two, three, four, like plenty of them were administratively dissolved. Why? Because they were not paying taxes, not filling anything out. It's basically you created the rapper and then forgot it even existed. The thing is once you create a rapper, you're supposed to follow up and you have some obligations. So the other things like it becomes quite a long-term commitment because the question is also who can decide to unwrap. Do I need a DAO vote or like could the person who's the local

director member whatever decide without me? This is also something important because in some cases you may end up as in the arrogant case with someone just taking a decision without even reaching out to the DAO. So also what is the cost of doing it? Because in some jurisdictions you realize it's super expensive or like you you need some time because you have the whole liquidation period and so on. So maybe super expensive is an exaggeration, but still when it's the end of the DAO because the project failed, sometimes there's barely any money left and all of a sudden you realize you need to pay a lawyer just to wrap up the process. This is something to be taken into account. It will not happen overnight. So in a nutshell, what do I need to keep in mind? Well, the marketing fluff, the things that you

don't need to take into account because they're not relevant is the speed of setting up. It's not because it's fast that it's good. the setup costs because in many cases they disguise also recurring costs that you don't take into account like uh paying for a local director for example and the numbers when you think about it are pretty high. Sometimes you have like 50k on an annual basis just to pay someone to be their local director. Is this something that's justified in your case or not? The DAO branding is not because it's branded as a DAO LLC, a special DAO association that makes it specifically fitted for your case and your DAO. the trends like we we hear often like others did that so it seems good or my VC recommend it fine but sometimes it's just a habit it's not

because VCs like for example the setup came in BVVI that this is the best setup in every case in some projects we see that it would be like a fake way of like structuring things which could be structured in a much more efficient manner elsewhere and then also the lenient reputation it's not because everyone says oh BVI is great because no one really cares about things. No, they actually may care about things and it's just a reputation. You never know how things will evolve. Um the I mean there are also vast flaws as mentioned and vast as in those jurisdictions. So just don't rely on reputation alone because reputation does not equate reality and what truly matters and I'm wrapping up here because the time is off is the choice of a house. So the rapper and the

landscape as I mentioned you need to also choose the landscape or regulation that fits. You need to be aware about the power of defined actors that interact in that system. You need to know what is the action power of the DAO. So what is the scope of decision and how do you align the DAO and the raper frameworks like does the governance align with what legally is out there? And finally be aware from an administrative perspective. Don't forget taxation and accounts because it seems like a overkill but at the end of the day those small details matter. So, thank you very much for paying attention and feel free to reach out if you want to discuss Dows. Thanks again.

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