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Notes.md

NOTES ON DAO AND SUCH

Where to Incorporate

Cayman/Panama Foundation

Generally used to incorporate DAOs and have similar features to a LLC without having an official director and a public list of members.

Pro:

  • Easy to setup
  • No need to KYC members
  • No UBOs
  • Anonymous members

Cons:

  • No banking
  • Poor reputation
  • Makes it difficult to sign agreements or partnerships

SPV + DAO

A LLC set up in EU/US to handle HR, recurring expenses and wages appointed by the DAO to offer such services for a fee.

Pro:

  • Easy to setup
  • The SPV does not have to acknowledge the DAO members
  • The DAO itself can remain unincorporated as a group of individuals

Cons: The SPV director may be legally responsible as the DAO/protocol UBO Banks may question the source of income

Swiss PLC

A limited company governed by shares that can be legally tokenised.

Pro:

  • Shares can be freely transferred as tokens on-chain within KYCd entities
  • The list of shareholders is not public
  • Can hold, trade and pay taxes in crypto (BTC, ETH or USDT)
  • Can access Swiss fintech/crypto sandbox

Cons:

  • Cost
  • Compliance burdens

Swiss Association

A no-profit legal entity with patrimonial limited liability, like an LLC, where membership is represented by tokens.

Pro:

  • Cheap to setup and maintain
  • Can properly represent a DAO and its members
  • Can create bank accounts
  • KYC for members not needed

Cons:

  • The director is public and legally responsible for the decisions taken by the DAO, unless s/he places a veto
  • Cannot sign SAFE/SAFTs nor enter in any business agreement or partnership
  • Cannot have revenues or distribute dividends
  • Cannot join the Swiss fintech/crypto sandbox nor obtain any type of licensing

Privately held protocol

A for profit company is set up to represent the protocol activities and members and share profits derived from its activities.

Pro:

  • No community giveaway of equity
  • No risk of governance attacks
  • Less dilution of equity and profits
  • Easier to work with (banking, hiring, taxes, VC raises, etc.)

Cons:

  • May be frowned upon by decentralisation maxis
  • Token and equity may be uncorrelated (only in Switzerland equity is legally tokenisable)

Additional Notes:

The UBO is always identifiable and legally suable in case of illicit behaviour, terms like “shield” or “responsibility separation” are red flags without any legal value. The limited liability only applies wrt creditors.

A protocol, despite being a simple intermediary, can still be sued for providing unlicensed or illicit services and its developers and/or maintainers identified as UBOs.

An unclear structure (see Cayman foundation) may hinter any type of collaboration with traditional entities like banks as the UBOs and the compliance policies applied are questionable.

Casus legis: Silk Road officially was charged for facilitating trades of illicit goods. Its creator did not engage in the sale, advertisement or purchase of drugs or weapons. Yet, as the platform was not properly performing due diligence on items listed, it was deemed illegal.

Steps towards a legally compliant DeFi

  • (Opinion) DeFi can still operate due to the regulators being unaware of what it is and how it operates. From a legal standpoint developers and UBOs are fully responsible for the products they develop and launch, regardless of the “code is law” adagio. See the case against Mr. Pertsev, core dev of Tornado cash and Mr. Eisenberg, exploiter of the Mango market

  • Certain jurisdictions (Switzerland, Lithuania) allow a prompt communication with the regulator to clear out specific questions about financial services

  • Lower tier financial licenses like VASP (Virtual Asset Service Provider), EMI (Electronic Money License), Swiss fintech license, PIL (Payment Institution License) only allow custody of funds. Only the banking license allows investing user funds, engaging in debit or credit services/lending or offering securities to retail. A possible workaround is to incorporate as a hedge fund and have users be part of it by signing, even with their wallet, an investment contract. The necessity of filling in the Mifid questionnaire, KYC/AML and limitations to invested capital still apply. A hedge fund SPV needs to be incorporated in all jurisdictions where users are based

  • Banking license still remain the only compliant way to offer investment services to the general public.

    • A Portorico banking license: low capital requirement of $550k, easy US passporting, 1y application timeline, local office + 4 local employees needed, offers easy passporting to the US

    • A Specialised Bank license in Lithuania would allow offering financial services with automatic EU/EEA passporting and rather low fees (30-50% higher than Portorico)

    Specialised Bank: a credit institution established in Lithuania, which has the right to receive deposits, lend funds, provide transfer of funds and other usual banking services. A specialised bank cannot provide investment and other similar financial services. More here

    • A Swiss fintech license, despite what previously said, may be extended to PoC novel financial services after getting extraordinary authorisation from the FINMA. More here

    Swiss fintech license

    • An alternative investment fund in Estonia, can offer services in the EEA to up to 150 users for each EU country, including stocks, real estate and crypto, but minimum investment size needs to be 100k. It cannot engage in financial services like mortgages or lending. More here

    • An EMI license: despite not being an applicabe way to offer compliant DeFi services, it can be the start of a process to obtain further licensing and get a chance to speak with the regulator. Small EMI license in Spain application is free of charge and only requires $20k in legal expenses with a limit to $1m monthly transactional volume. An example is Plutus, a crypto-backed debit card that offers vested cashbacks in their native utility token.

Notes on acronyms

  • PI - Payment Institution, can only settle instant charges from cards. Example: Stripe

  • EMI - Electronic Money Institute, extends the PI license to also support swapping fiat for electronic money, all deposits must go to a licensed bank and cannot be lent or borrowed; short term credit is possible using the company own capital. Example: Revolut, PayPal

  • VASP - Virtual Asset Service Provider, is an umbrella license that can require multiple licensing depending on the country. It allows to offer exchange services (crypto-crypto and fiat-crypto/crypto-fiat) and crypto custodial services. Example: Binance, Coinbase

  • Specialised Bank - Compared to a traditional banking license, a specialised bank may provide somewhat fewer services – it is subject to limitation in investment and a number of other financial services. Costs: 5k€ application fee + 50k€ yearly state fee, min 10 employees. A specialised bank can provide following services:

    • acceptance of deposits and other repayable funds;
    • lending (including mortgage loans);
    • financial leasing (leasing);
    • payment services;
    • the issuance and administration of travel vouchers, drafts and other payment instruments, provision of financial guarantees and financial guarantees;
    • financial intermediation (agent activities);
    • money management;
    • creditworthiness assessment services;
    • rental of deposit boxes;
    • currency exchange (in cash);
    • electronic money issuance
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