In the Legal Landscape blog series, we are exploring the emerging legal and regulatory landscape surrounding cryptocurrencies, legal avenues allowing DAO projects to gain legitimacy in the eyes of investors, lawmakers and the broader public, as well as ideas on how decentralized technologies can achieve harmony with legal constructs. Disclaimer: The contents of this blog do not constitute legal advice and are provided for general information purposes only. If you require legal advice you should contact a lawyer.
In this article, we will be diving deeper into the legal framework of Liechtenstein. Sometimes legal development can serve as a prevention mechanism, other times it serves as a responsive and complementary construct that allows technological developments to gain more credibility, legitimacy and thus foster innovation in a specific area. Our main goal this time is to highlight some existing legal solutions and find out what types of legal applications and wrappers are offered to decentralised autonomous organisations (DAOs).
In order to understand what laws may apply in a given situation, one must first truly understand the nature of a decentralised organisation. So far, there is no consensus around the definition of a DAO. If you ask ten different people, you may get ten different answers. During the earlier days when the concept of a DAO was proposed, the “autonomous” nature implied that smart contracts alone managed the system. But what people are calling DAOs nowadays does not necessarily subscribe to this definition. For that reason, when we mention DAO in this article, we are going by the Wikipedia definition:
“A decentralized autonomous organization (DAO) is an organization represented by rules encoded as a computer program that is transparent, controlled by shareholders and not influenced by a central government. A DAO's financial transaction record and program rules are maintained on a blockchain.”
Like any other organisation, DAOs present constructs with their very own governance and a set of decision-making rules. While a traditional organisation is governed by a written set of bylaws defining how decisions or made or how assets will be distributed, a DAO will use software in the form of “smart contracts” to represent both rules as well as the assets and their distribution. When people establish a traditional organisation, they normally vote in person, raise their hands to showcase their approval and write down, collect, count the votes and announce the results of a ballot. DAOs on the other hand allow these votes to be token-based, and render the whole voting system to be much more fluent, transparent and safe. The tokens can hold different types of functionalities, and can also be allocated to their members as rewards, reimbursements for work, reputation, etc.
Codifying or tokenizing management processes and assets of an organisation, however, does not mean that one no longer needs to properly incorporate, nor does it render legal entities obsolete. There are many reasons to seek a suitable legal entity for a DAO, the most important being limiting the liability of the organisation’s members. Without such a “legal wrapper”, the default classification may fall back into a “general partnership”, which means that every member or investor can be held personally liable if any legal action was ever taken against the DAO. This is a reason why organisations such as The LAO or dOrg are incorporated as LLCs.
Yet, Limited Liability Companies are one of many organisational types at a DAO’s disposal. Bearing in mind that currently most decentralised organisations demand a high level of human involvement, where individuals quite often contribute their know-how in order to gain reputation, tokens and thus become a member of an organisation. Thus it is worth looking into traditional organisational structures that are established under similar conditions. Dealing with structures where human labor is of great importance and where non-cash investments are necessary for the development of the organisational structure, engagement rules describing complex collaborative mechanisms are often fundamental to cooperatives.
McKinsey’s report on cooperatives states they “represent approximately 3 to 5 percent of the world’s GDP. They are present in nearly all economic sectors, from agriculture to retail to financial services... Their unique member-ownership structure and democratic governance model make for organizations that are powerfully aligned on mission and strategy, with a focus on preserving long-term stability”.
We can already observe some early cooperative experiments in the blockchain ecosystem. The Robin Hood Coop, is an activist investment fund and cooperative that bends the financialization of the economy with the use of DLT-based software to manage cooperative assets and distribute the benefits among their members.
In contrast to public companies, the cooperative’s primary purpose is not to maximize profits for the benefit of its shareholders but rather to provide goods and services to all the members at the lowest cost possible. There are numerous industries such as insurance, banking, retail and agriculture where cooperatives have established their presence. Therefore, it does not come as a surprise that numerous jurisdictions offer variations to how cooperatives should be managed. For example, England offers more than 15 models of cooperatives, among them Worker Co-operative Society, Community Benefit Society, and even Co-operative CIC Limited.
As DAOs are by default bringing together ideas, work, capital and innovation - there is yet another special type of a cooperative model - Venture Cooperatives - that seems to fit that purpose as well. In 2016 Liechtenstein provided some legal amendments to enable Venture Cooperatives. A Liechtenstein Venture Cooperative (LVC) was created for the purpose of bringing more support and certainty to founders and investors. From the Liechtenstein website:
“An LVC is a platform for several parties to cooperate on developing an innovation. With the establishment of an LVC an innovator directly incorporates his idea into a specific legal structure and thereby prepares the basis for facilitating cooperation with other specialists and investors. The LVC offers a legal basis for bringing together the work, non-cash contributions and capital contributions from various persons (both private individuals and legal entities) that are required to develop an innovation, in the form of an investment. This means that the founders can prove that they already described the invention in that form at the time of establishment. The inventor or inventors are given shares in the company for contributing the idea to the LVC or doing the preparatory work.”
When several people work on new startup ideas, it’s hard to measure the success rate while the risks investors are taking are high. It makes sense that the establishment of an LVC requires no initial capital and deems the innovation itself to be the capital contributed to the company.
LVC also brings clarity around ownership of the innovation - it does not belong to the innovator, nor the investor alone. When an idea is contributed and presented (or goes live), it becomes the property of the whole LVC. Looking at the blockchain-based tools that are being designed today, such as Aragon, multi-party ownership structures are enabled with such tools, bringing the permanence of a distributed ledger to provide certainty of ownership and rights. Merging a powerful tool with a well designed legal wrapper that creates a combination of innovation, profit, growth and social good - we can borrow Ms. Rosabeth Moss Kanter’s expression and classify this as a ‘’super coop’’.
There are a few fallbacks which might render the LVC unattractive to DAO purists that we should dive into. First and foremost, the paperwork. In order to form such a cooperative, one must write and sign the articles of association, formation deed, founder’s resolution, innovation document, membership contribution regulations and unit register. Additionally, holding all assets in the DAO’s smart contracts does not allow one to avoid the tax administration or the opening of a bank account - both are strictly required.
Compared to other legal entities however, the LVC is still perceived to have an incredibly simplified setup and is privileged as it benefits from Liechtenstein’s liberal tax regime. More importantly, the shareholders of the LVC are not personally liable for any debts of the LVC and the founders can save quite some money on a name, trademark, patent or a license as these can all be set under the name of the LVC.
Nevertheless, legal wrappers work like any other design: the form should always follow function. The most important step therefore is establishing the foundational principles of the functionalities your DAO should have, and finding the jurisdiction and corporate code that best fits it, rather than the opposite. For those who already feel like this legal framework is what your organization needs, here are the draft articles of an LVC to begin your evaluation.
Are you looking to start a new decentralized project or community, or run your organization in a more non-hierarchical way using blockchain-based governance? Autark wants to help you by building the right coordination tools for you. Check out the instructions on our apps page, and if you need more support - tell us what your community needs. Fill out this quick research survey or join our community chatroom.