DAOs Beware: Neo-Imperialism Is on the Rise in Crypto-Land

Sometimes I have to read a text twice before grasping its full implications.

This happened to me with a recent blog post by the legal team of Andreessen Horowitz (a16z), one of the largest venture capital firms active in crypto. The text introduces the Wyoming DUNA, a newly created legal entity type designed to cater to the needs of decentralized autonomous organizations (DAOs).

At first sight, everything seems perfectly reasonable with DUNAs, short for a “decentralized unincorporated nonprofit association.” But read again more carefully, as someone who is truly passionate about the principles of decentralization left me with an uncomfortable feeling. Where did this discomfort come from?

Before answering that question, let me clarify two things:

First, I believe that DUNAs are a great legal innovation. The U.S. state of Wyoming is doing a stellar job in creating legislation that supports the crypto industry in general and DAOs specifically. I think the DUNA structure is likely going to be a good fit for many project teams and hope that it will be a success.

Second, I acknowledge that there is a faction within the crypto community that has strong “anti-VC” sentiments – but I am not one of them. To the contrary, I think that venture capital is — overall — a positive force in crypto, and while some criticism is warranted, much of it is unfair or exaggerated. Firms like a16z contribute to the growth of crypto in multiple ways. Investing other people’s money in a sector as volatile and fast-moving as crypto is not a laid back affair, and we should applaud the people that have the courage and vision to do so.

See also: Wyoming Grants DAOs New Legal Structure

With that out of the way, let me tell you what concerns me about a16z’s blog post:

By their own account, a16z intends to make DUNAs “the industry standard for blockchain networks.” They intend to do so not just by providing operational support and educational material, but, where appropriate, by making the adoption of a DUNA structure “a condition of investment.” In other words: If good arguments do not convince DAO operators, probably the threat of withdrawing funding opportunities will.

This doesn’t sound right.

Haven’t we all signed up for the promise that we can build a new type of internet that works independent of nation states? And now a U.S.-based venture capital fund is telling us that this doesn’t work ain’t so. Instead, we should all locate all our “decentralized” activities in wait for it — Wyoming, USA?

Forgive me for becoming emotional, but this feels a bit too much like neo-imperialism entering crypto-land.

But emotions aside, let’s dissect a16z’s arguments. As I will show in the following, none of them are particularly convincing — unless you’re a U.S.-based VC:

Legal status

A16z argues that DAOs need “legal existence.” They go on to make claims that failing to adopt internte structures has limited the growth of blockchain networks — however, without providing any evidence to back up this claim.

These types of blanket statements are not helpful and likely to be wrong in many circumstances. Without a doubt, there are DAOs or blockchain networks that benefit from adopting a traditional legal entity structure, but definitely not all. Imagine Satoshi had started bitcoin (BTC) by setting up a legal entity before releasing the Bitcoin code. Do you think we would be where we are today under this scenario? Certainly not.

The choice of legal structure should follow an analysis of what it is that you want to achieve. By prescribing a specific legal entity type before a sound analysis of the requirements of a project, you are putting the cart before the horse. A DUNA may or may not solve project teams’ issues, and there are many other alternatives that might be better, depending on the facts and circumstances of the case at hand.

Taxes

Maybe the most surprising argument that the authors make is that DUNAs are great because they empower the DAO to pay taxes in the U.S.

Wait what? Did they really write that? As a PRO argument for DUNAs?

For someone who has worked in the structuring of international businesses, this sounds bizarre. Typically, great efforts are expanded to minimize tax exposure to the U.S. as much as possible. For DAO members who are not U.S. tax residents, I have a hard time imagining how a DUNA can improve their tax situation.

As the authors rightly point out, you really need to understand “individual facts and circumstances” to find an optimal tax structure. But if we can generalize at all, I doubt that DUNAs would even make the Top 10 list of structuring options unless the DAO is purely U.S.-based.

By the way, I do understand that from a tax perspective, the DUNA might be a good structure for a16z. As a U.S. entity with substantial interests in many DAOs and networks, I can imagine that dealing with U.S. entities reduces their tax risk substantially. But to be blunt, this is primarily their tax problem to deal with. What is best for them should not dictate the terms for everyone else.

Liability

The authors argue that currently, members of many DAOs face significant liability risks since the legal status of DAOs is unclear. This is absolutely true and is an issue that urgently needs to be solved. What is not true, however, is that a legal entity wrapper is the only way to address this problem.

One alternative is a set of private contracts between DAO members, as implemented for example in the project I founded, Q Protocol. This legal technique effectively lets members “opt out” of their local jurisdiction by “opting in” to privately agreed rules. Contrary to what a16z claims, such structures are not “fantastical.” They have been tried-and-tested in the “real world.”

Of course there are limits to what can sensibly be structured via private contracts, but this is true for every structuring option.

See also: Regulators Everywhere Should Follow Wyoming’s DAO Law

Wrapping a DAO under a single legal entity might be the “lazy” version of reducing liability risk, but likewise, there are limits, and not all liability risks evaporate only because you have a legal entity. At the end of the day, again, there is no substitute for an analysis of each DAO.

Other considerations

There are more reasons why the desire to create a de-facto standard legal entity structure for DAOs is misguided.

First, the crypto landscape and the legal frameworks around it are still evolving. To believe that we have already found one optimal structure is naïve. As an industry, we would be much better off if we continue to innovate and keep an open mind about legal structures. DUNAs are great, but I would be surprised it they are the ultimate form for DAOs. Converging to one standard to early is a sure way to stifle innovation.

Second, jurisdictional diversity is a key element of decentralization. When designing networks that have autonomy as an explicitly stated goal, it is simply unwise to put the fate of those networks into the hands of one specific legislator. Again, this is not an argument against DUNAs. I believe that they are a great new addition to the tool set available to DAO and protocol designers; they just shouldn’t be relied on without alternatives.

Legal entity or not

DUNAs are great, but let’s take them for what they are: One option among many if you are structuring DAOs or decentralized networks. There is a world outside the U.S. where many options exist already today. But we should not lose sight of the most important one, which is for code and communities to exist autonomously without a legal wrapper around it. Anyone selling a specific solution as THE standard will be wrong. DAOs beware.

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