Decentralized Autonomous Organizations: Legal Issues

If your clients, neighbors, and friends are not yet talking to you about Decentralized Autonomous Organizations (“DAOs”), they soon will.

Harris Bricken attorneys Jonathan Bench and Robert Lamb sat down to discuss Decentralized Autonomous Organizations (DAOs) and the legal issues that come with them. A transcription of this talk can be found below.

A DAO is an online community using a blockchain to pool resources and transact for a specific purpose. DAOs have no hierarchy, central control, corporate form, or traditional entity contracts. The rules of investing and participating are on the blockchain’s “smart contracts.” DAOs achieve an “organization” that is “autonomous” to the group and “decentralized” in operation. Robert Lamb previously blogged about it on the HB Blog, The Paradox of the DAO and the Corporate Form.

But in most jurisdictions, an organization of two or more people for a purpose, without corporate formalities, is a general partnership. A general partnership has no liability protection, and organization liabilities flow “jointly and severally” to each of the participants. This is an ominous legal reality for DAOs and their members. This video is the first in a series of shorts regarding the legal underpinnings of web3.

This podcast audio has been transcribed by an automatic transcriber.

Jonathan Bench 0:06
Rob, welcome. This is our first YouTube video, we’re planning on posting this to YouTube. We’ve done some podcast episodes together. And this one we want to specifically focus on on DAOs. Now this is going to be a little free flowing consciousness right here. But I think it’ll be fun for us because you and I are both playing in the space. Why don’t you start off by telling everyone what you do. And then a little bit about the crypto conference, you went to Portugal late last year?

Rob Lamb 0:34
Sure. Thanks, Jonathan for having me. I’m a finance lawyer 20 years working in international finance of one way or another. The last few years, I have been somewhat focused on cryptocurrency digital assets, both on the investor side and on the structure side. And over the last six months, I’ve been really focused on it to the tune of almost 90% of my overall practice. In in April, excuse me, in November of last year, I attended in Lisbon, Portugal, I attended the salon a conference, and we are actively looking to go and participate in a lot of these conferences, which are all over the world right now. There’s a there is the movement is real, I think there’s a opportunity for good lawyers that have the right approach. And so that’s part of what I’m trying to do here.

Jonathan Bench 1:36
So how are you received at the salon conference? I really haven’t talked to you since then very much. So this is a great chance to download. I’m curious because I was at a conference just last week in Salt Lake City, they call it cryptopia. And I met one other lawyer there. And he was a cybersecurity lawyer, not a not a financial transaction lawyer like you and I are. And so I thought it was really interesting to I’m curious how, how was everyone talking about this movement? Right? I mean, are lawyers even in the picture yet? Is this very much a, you know, Rise of the of the coders and the proletariat against all systems? And does that include lawyers too? That’s I know, they don’t like us. Nobody likes us, right? But we’re a necessary evil.

Rob Lamb 2:15
That’s actually a really good question. I’m Gen X. Right. So I was born in 1971. So I’m exactly Gen X. And so I think that that’s the first click against me. And even before they find out that I’m actually a lawyer, and and then to be a Gen X lawyer, that is sort of perceived as part of the problem, or at least part of the the legacy that is so much of what decentralized or defy wants to move against or move away from that, I think that the I get two reactions, especially when I interact, say, like a portrait in Portugal, at the salon or conference or wherever in the space, even virtually, I tend to get to two responses. One is defensive that that is they they just assume that I come in with a certain amount of old school paradigm, and that I’m going to be an impediment, ultimately an impediment to what they’re trying to achieve with defy sort of that’s sort of one group. And the other group is, oh, we really need lawyers in space. And all you’re interested in this space. So why don’t we pull you in further, could you help us with this or with that? Just one case in point I was recently hired by a DAO by a decentralized autonomous organization, an existing one, to help them with some legal work. And it was announced, it was announced within their their smart contract within their participant base that I was going to come on and help. And and I was immediately attacked and praised at the exact same time on Twitter. People actually, doubt participants within that DAO sought me out and basically said, stay out you evil Gen X, or we don’t need you and your legacy types in this space. And decentralization is is sacred and don’t you dare disrupt it. And then I had others that were saying, Wow, we we realize now after four or five months of operating as a DAO that you actually do need, you do need lawyers, you do need sort of old school traditional thought process and strategy around what we’re ultimately trying to achieve. And I agree with both those positions to be honest with you, I I frankly think that my interaction with lawyers that are trying to understand the space and that are trying to inch in that the possibility of getting into the space, they need to do a fair amount of paradigm shifting themselves. They need to be able to be creative within their knowledge base and their skill set to be able to to work with structures and opportunities within defy and that’s That’s the approach that I’m trying to take. So I sort of not offended by either approach and sort of embrace and love both approaches, because I think ultimately, that you can achieve defy within traditional structures.

Jonathan Bench 5:14
And that’s a great perspective. And I think that a lot of people who don’t, aren’t used to interacting with lawyers think that we are there to kill the deal, right, we’re there to make make things fall apart and make it too difficult to make it too painful for the other side or whoever, whoever is opposite who we’re working for. But I think those who interact with people like us find that we are we are the business type where the creative types who want to understand everything and want to make fun want to find a way to make it work, right. We’re ultimately the ones who we thrive on getting deals done and figuring out creative ways to make it happen. I think you articulate that very well. So let’s turn, I think we’re trying to keep this to about 15 minutes. So we’ll see how successful we are at that, because we want to keep it in nice, small bite sized portions. We’ll come back and talk later about other things. So what about this concept of decentralization? I mean, we have we have the idea that maybe we start with a corporate forum. Okay, let’s, let’s talk about that. Because you you wrote a blog post recently, and I’ve been following your work and learning on my own too. But I want to say every jurisdiction in the world, there is someone’s got authority, right? I mean, there are there are these kinds of forward thinking offshore jurisdictions that are doing things, but in most jurisdictions, if you and I want to get together and do anything, we are de facto a partnership. Can you talk about that? A little bit?

Rob Lamb 6:28
Yeah, yeah, that’s exactly right. And, and that, that, that it’s a true paradox. And, and if you are nothing, but you’re you’re venturing with a group, just like you said, you are in most jurisdictions, and most common common law jurisdictions, you are considered a partnership. So you are a thing. And and and if you don’t actually go through the process of formalizing what that thing is, it may be the wrong thing, from for tax purposes, for liability purposes. Ultimately, if you want to function as a general partnership, that’s that’s a possibility and unstated, unfiled, general partnership, it definitely is a possibility. But most likely, it’s going to be the wrong thing. There’ll be limited liability issues, or liability issues, there’s going to be tax payment issues, there’s going to be an ability to hire and fire developers and that sort of thing. So there’s your practical reasons that a general partnership probably isn’t the right thing for you to be. So so then you say, Well, what am I and, and again, we’ve already talked a little bit about I won’t keep going over but but the those that are participating in DAOs, and what I mean by that are those that are jumping in with their resources, their cash, and they’re jumping in and participating in the DAOs a lot of those are sort of part of this global movement that don’t want structure and form. They actually like the autonomy, of participating of army without having those those those structures. But again, there’s just reasons that ultimately you’re going to want to do that. And we’re seeing that play out already. I think in the initial phase, in this initial push of DAOs, there is something of a romantic tie, almost a dogmatic a sense that decentralization defy is the way to go. But ultimately, it just practically doesn’t work. And so and so you have to choose one, what you’re going to do about that, and there are some options that we’re starting to work through and be creative through.

Jonathan Bench 8:24
So let me interject a second because everyone who hasn’t been around longer than 30 years may not know that the We the corporate community in legal world developed LLC is to get away from partnerships. Yes, they will meet people who say fine, I’m a partnership. Okay. Yeah, I understand. We got liability and things. But we created that we created LLC in the 90s to get away from partnerships. And so these that DAOs are now inadvertently backing back into law that we tried to get rid of 30 years ago, or we stepped away from 30 years ago. A lot of people may not be aware of that, right? Anyone, anyone, like I said, anyone who’s younger than 50 probably has no concept of this.

Rob Lamb 9:02
That’s That’s exactly right. And, and in fact, in fact, that could serve as something of an analogy for what I believe will will happen. And we’re seeing already I’m physically located in the state of Utah, and I’m part of a legislative committee to help deal with legislative options around DAOs. We’ve talked a little bit also about Wyoming, Wyoming in their last legislative session, I think about a year ago, they wrapped their LLC code around a DAOs in an effort to attract DAO organizations to come to Wyoming to incorporate in Wyoming and to get all the benefits of an LLC. The the problem with that is that it doesn’t exactly fit it every DAO is different every DAO has different level of participants. Every DAO has participants from all over the world. It tries to fit and I think that Wyoming should be commended for trying and attempting to fit but it ultimately Probably doesn’t fit. And and what I think that you’ll see are jurisdictions, specifically crafting legislation, just like we did with LLCs, we’re going to do ultimately I believe with DAOs. That is to create legislative flexibility to where that can be, to a large extent, decentralized, but also having corporate form a corporate structure to do and to carry out regular corporate functions. I think that’s where we’re going. But we’re not there yet, which is part of the problem.

Jonathan Bench 10:32
Okay, so what else is on your mind? You’ve been meeting with organizers of DAOs? What is happening, as you’re, as people are trying to marry money together with, with a doubt? I mean, you don’t have to have a doubt with money, but a lot of them do. A lot of them are forming for some kind of what I would call a business purpose. So what are you seeing? And how are you talking around that idea of marrying, marrying money into DAOs? You know, the intersection of your traditional corporate finance background with with what you’re seeing now?

Rob Lamb 11:02
Yeah, it’s interesting that that it’s working. I think it’ll be a lot like the web three industry generally, and that you’ll have winners, and you’ll have losers. And you’ll have those that are first through the bloody first through the gates. And, and it’s still, even though daos, I think had been around, I think the first one was launched in 2616. So it’s sort of been around a while now. But there’s a real push last year. And then I think into this year, I’m feeling and hearing and seeing and participating as a lawyer and a lot of the bugs in the activity. And and they tend to work if they can be identified to purpose, if they can attract a certain segment or audience specific to their overall purpose, they tend to really work well, whether that be to raise money around investing in NF T’s what you see a lot of whether you see traditional, using it as a vehicle to raise a certain segment, certain businesses like insurance and global insurance, we’re seeing that as well. I think it’s a really effective way to globally crowdsource as a concept or an idea, or a business. And so I think that the trend is is is only heading north, and you’re gonna see more regulation, you’re gonna see more jurisdictions, both from an inviting standpoint, trying to create this type of legislation that attracts DAOs. And, and you’re going to see more more opportunity to participate. That is, if you were on if you have a digital wall, if you have this, this knowledge, the skill set and how to participate and play in the web three space, this will be a really nice place that you can diversify your overall participation, and join and jump in some of these doubts. So as a finance lawyer, that’s what has been involved in m&a. And it’s been by private equity and venture capital, I see it as a really cool trend, that’s only going to increase in birth, in birth, those that are participating. And, and, and you’ll see more traditional finance businesses jumping in as well private equities, venture capital, perhaps mortgage companies, perhaps insurance more traditional, through chair or excuse me, more traditional companies that are using a DAO mechanism to create cash.

Jonathan Bench 13:24
Okay, so far last minute and a half. tease a little bit about I know it’s gone by quickly, but we wanted to keep this in a reasonable chunk. So in the last minute and a half, can you talk a little bit about the simplest DAO form is you’ve been trying to craft, you know, marrying DAOs in good jurisdictions with a corporate form. What is the simplest I want to say? What is the least number of countries involved in creating a true, true global DAO that you think works at this point in time?

Rob Lamb 13:53
Yeah, okay. So here’s the fundamentals for for legal form, Tao structure, okay. I like offshore structures, because I think that one jurisdiction is better than multiple jurisdictions in that, if you form in the United States, say if you form an LLC, and then you want to be creative outside of LLC, or you go to Wyoming LLC, you still have a federal government overlay to everything that you do. And that is just uncertain right now. So I like I like offshore entities, because there are specific jurisdictions that are trying to accommodate so much of what’s going on in the space. They’re ahead of the United States, for example, BVI, Cayman Islands, I like Gibraltar as well, Singapore is doing a fair amount, Panama is actually doing a fair amount. What I like to do then is create limited entities in those jurisdictions with the right contract structure and, and connection between the smart contracts, actual legal connection between smart contracts, and then designated boards. And then there’s a possibility of bifurcating those functions, that one segment of that bifurcation is always under some level of limited liability, corporate formation, so they can do a lot of things they want to do. But yet the D fi itself is allowed to stay in place. And there’s sort of a protocol defi aspect to it. And then there’s sort of corporate form that’s wrapped around a corporate structure. That’s, that is the creation or the creative approach that we’re starting to take. And it’s, we believe it will ultimately work, there’ll be country to country application, there will still be where we still have questions like, Where are you developing? Where are your developers, were some of your activities, we saw a lot of that to sort of sort out on a case by case basis, but I like the offshore bifurcation strategy. And we’re having some success putting those together.

Jonathan Bench 15:50
That’s great. So maybe the next time we talk we can dig it really deep into the into the forums and the specific jurisdictions, you know, in the US outside the US, you know, where the forward thinkers are the and also would love to hear ongoing updates about your work in the Utah legislature so that we kind of get a sneak peek into how Utah is adapting and maybe maybe doing it in a better way than Wyoming or any other jurisdiction has so far. No, I think that’s wrong. Rob. That was great. Thanks for the time.

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