DAOs and Web3 Communities: Legal Services and Advice
Our law firm brings together experienced crypto lawyers and advisors to provide comprehensive legal services and support for decentralized autonomous organizations (DAOs) and Web3 communities worldwide. We offer legal advice and guidance for even the most complex DAOs on legal, regulatory, and organizational issues that arise during their operations.
DAOs from a Legal Perspective
Decentralized Autonomous Organizations (DAOs) are quickly gaining popularity as an innovative and transparent form of organization. A DAO is a blockchain-based organization that operates through smart contracts and does not require a centralized authority.
The legal landscape for DAOs is complex and constantly evolving, with regulatory authorities around the world grappling with how to classify and regulate them. Activities of a DAO may fall within the scope of various regulations, including tax law, securities law, anti-money laundering regulations, VASP regulations, data protection laws, and IP laws. Compliance with these laws is crucial for the success and longevity of DAOs.
The legal classification of a DAO may vary from jurisdiction to jurisdiction and depends on the type of organization and how it is structured. However, in most cases, DAOs are considered unincorporated associations or partnerships because, in a DAO, members come together to advance their common interest or achieve a common goal, uniting their efforts and sometimes assets.
Legal, Regulatory and Tax Risks Pertinent to a DAO
Taking into account the above qualification, we can see that there are a number of legal, tax, and regulatory risks pertinent to a DAO. For example, the first issue is the unlimited personal liability of the DAO members. As partners, they are jointly and severally responsible for the obligations of the whole organization, meaning that every member or group of members can be held personally liable for the organization’s liabilities.
Tax risks that DAO members face are significant. Given their joint control over the DAO’s property, contracts, and assets, government authorities or courts may rule that such property and revenue derived from the dApp (decentralized applications) or protocols should be viewed as the property or income of the DAO’s members or managers, which will adversely affect the tax liabilities of such persons.
Regulatory risks related to the operation of dApps and blockchain protocols are also substantial. The operation of financial and DeFi protocols often triggers regulatory obligations under AML/CTF, financial, VASP, and other legal frameworks, which can place a heavy regulatory burden on the DAO and its members. Any non-compliance can result in potential legal and enforcement actions against the DAO and its members.
Legal Services and Advice for DAOs and Web3 Communities
Legal compliance is crucial for the success and longevity of DAOs and plays a key role in avoiding legal and financial liability by the organization.
Crypto attorneys at AURUM Law Firm provide DAOs and their core contributors with guidance on legal compliance and advice on matters relating to the DAO structuring, tax compliance, securities laws, VAPS and anti-money laundering compliance, and intellectual property protection. Our lawyers advise the DAOs and Web3 communities on the smart contract creation and deployment, control and management issues relating to their dApps, DeFi and other protocols, treasury structuring and other important aspects of their operation.
DAO Legal Structuring
DAOs can be structured in various ways. While a limited number of DAOs may be structured as a limited liability company or partnership, this will not work for the most of DAOs out there.
In the majority of cases, a DAO cannot be structured as an entity as a whole, either because of the size of the organization, anonymity, members’ eligibility requirements or due to other reasons. In this situation, the objectives of the DAO structuring are best achieved via the creation of a so-called “legal wrapper” underneath the on-chain DAO.
Such a legal wrapper will not absorb the DAO, meaning that the DAO will continue to operate as is, but will allow the DAO to transfer many functions and responsibilities to such legal wrapper, thus placing all related risks and exposure onto the entity. A DAO can further have multiple sub-DAOs or committees structured in other forms, which will altogether comprise one big organization.
Having a legal wrapper allows the DAO to gain legal protection, manage tax and regulatory obligations, enter into contracts, own assets, make fiat payments, and engage in real-world operations.
After an extensive period of working with DAOs and Web3 teams, our team has developed a separate product designed to address some of the significant challenges and difficulties that DAOs face. It is called “Daobox”.
Legal Structuring of Crypto Products such as dApps, DeFi, and Other Blockchain Protocols
Proper legal structuring of a crypto product is a crucial element of DAO structuring. An unstructured product launch carries substantial risks for the core team and the DAO as a whole in terms of legal risks, liability, and violation of applicable laws.
A decentralized product launch widely pursued by the DAOs is a complex and daunting task. For a product release to be considered decentralized, multiple technical, organizational, and legal steps have to be taken before the product is first released.
It is beneficial for any organization to approach the legal structuring of its products way before their release so that our experts are able to advise on all major matters and assist with taking steps and measures aimed at mitigating major regulatory risks arising in connection with the envisaged crypto products and services.
DAO Regulatory Compliance: AML, VASP, and Financial Laws
It is no secret that regulatory frameworks are becoming more sophisticated, and regulators are becoming more aggressive. The latest AML laws and guidelines provide for enhanced mechanics of identifying the operators of decentralized products and protocols, putting the core team and DAO members at risk of being subject to heavy regulations.
More and more countries around the world are introducing their own VASP laws, which are special regulations governing the activities of virtual asset service providers (including cryptocurrencies). In countries where VASP regulations have not yet been adopted, and sometimes alongside VASP regulations, the activities of crypto projects may fall within the scope of legislation governing traditional financial markets, financial instruments, and investments.
Our lawyers advise DAOs and Web3 teams on issues of regulatory compliance, application of and compliance with AML/CTF laws, VASP frameworks, sanction regimes, financial and other legislation.
DAO’s Intellectual Property Structuring
Every enterprise needs to have its intellectual property properly structured, and DAOs are no exception.
To be able to properly own its IP, a DAO needs to collect the intellectual property rights in its assets in the legal sense in the first place. Distribution of source code and IP under open-source or other licenses can also be challenging as the project has to make sure that it is not violating the license terms applicable to third-party elements used in its code, correctly identify the license under which it can distribute the software, understand whether it needs to combine several licenses, and have the repository structured correctly.
As our practice shows, protecting the business name, product names, and web domains often helps the DAOs to avoid potential disputes and protect them from hostile actions by third parties.
Other Legal and Related Services for DAOs and Web3 teams
Other services offered by our crypto advisors and attorneys include:
- Formation and launch of a DAO;
- Set up and management of the treasury;
- Development of a sophisticated legal and regulatory strategy;
- Structuring the token issuance and distribution, advising on the tokenomics and token parameters;
- Tax advice and tax planning;
- Management of legal risks and liabilities;
- Advice on the engagement of contributors and contractors;
- Structuring the grant programme;
- Structuring relationships with the users of the products and services offered by the DAO;
- Advice on privacy and data protection matters;
- Supporting the day-to-day business of the organization.