Much has been written about the W3F’s approach to engaging with the SEC and the strategy to morph DOT from “security to software”.
Three years ago, in November 2019, Web3 Foundation made a decision that changed its trajectory and led to a transformation in business processes, people management and communications to the general public. We chose to take the U.S. Securities and Exchange Commission (the “SEC”) up on its offer to “come in and talk to us.” Today, we will tell you why. Web3 Foundation is pleased to announce a landmark achievement towards the realization of Web 3.0: the Polkadot blockchain’s native digital asset (DOT) has morphed and is no longer a security. It is software.
To date Parity and W3F employees have not engaged in governance directly (afaik) and there has been direct guidance that no employees should receive treasury funds.
This begs an important question for those currently involved directly in governance by voting their tokens or receiving treasury funds from proposals; what exactly is the legal status of the Kusama or Polkadot DAOs (not just the DOT token), and in turn what are the potential liabilities for those participating?
Regulation by enforcement
Some of the latest crypto enforcements in the US have focused on DAOs with the most high profile case being that of OokiDAO.
On Dec. 20, 2022, Judge William Orrick of the U.S. District Court for the Northern District of California concluded2 that Ooki DAO could be sued because Ooki DAO was an unincorporated association, and – to the disappointment to many advocates in the crypto community – that the CFTC’s service made through the DAO’s online community forum was sufficient.
Several organizations, including venture capital firm Anderseen Horowitz (a16z), filed amicus briefs4 in support of the defendant Ooki DAO. The issue before the court, as expressed in the amici’s argument, was that Ooki DAO can neither be served nor be a defendant because:
- It is a technology, not an entity;
- It is not subject to enforcement under the CEA; and
- It is not an unincorporated association.
Each argument was unsuccessful. First, according to Judge Orrick, the Protocol is controlled by the Token with administrative keys, and it was the actions of these Token Holders that the CFTC sought to regulate, not the Protocol itself. Therefore, the court held that the DAO was not merely a technology. Second, the court ruled that Ooki DAO was subject to the CEA because the CEA makes it unlawful for any “person” to engage in activities that do not conform to the requirements of the CEA,5 and the CEA’s definition of a “person” includes “individuals, associations, partnerships, corporations, and trusts.”6 Therefore, an unincorporated association falls within the definition of a “person” under the CEA and may subject to the CEA. - National Law Review
In the UK, the Law Commission - an independent body was asked by HM Treasury to offer guidance to the government on the legal status of DAOs and any changes which were required to English law.
As in the US, the Law Commission’s proposed starting point is that a DAO which is not designed with a particular structure in mind might be characterised under English law (as in the US) as an unincorporated association or general partnership.
This post 'That’ll be the DAO: an overview of the structure and status of decentralised autonomous organisations under English law’ is a great summary of the current situation gives gives broad context.
Governance engagement and community liability
Governance engagement is low in crypto - its not just a Polkadot issue. There are many issues, but a large one is that investors have taken the same line as Parity/W3F and are not active for legal reasons, namely…
Liability under a contract entered into on behalf of an unincorporated association would attach to the members of the association at the time the contract was entered into who authorised the contract, who would be jointly and severally liable.
Taking an extreme example - were treasury funds received by an organisation who conducted illegal activities, those community members voting to approve a spend would be jointly and collectively liable for those actions.
Where does this leave the treasuries as an organisational entity?
This is an open question - it would be great to hear from the W3F about their views not on the DOT token, but on the DAO’s likely position as an unincorporated association.
It seems oddly misaligned for there not to be a comment or even a warning to token holders about the potential liabilities of contributing to the DAO. Those participating in the ecosystem via companies will retain some legal protections, but many I’m sure are not operating in this way - and so this question is likely most pertinent to them.
Beyond legal issues, there then come tax issues - without incorporation of some kind, there can be no defined place of belonging which then informs rules such as whether VAT should be charged on services. (VAT on Services in/to the ecosystem) With no place of belonging, VAT is charged, unless the organisation is issuing grants and is structured as a public body..
Would love to hear from the legal brains in and around the ecosystem on this question and thoughts around incorporating an entity that offers a safety net for community members operating without protections, as a duty of care if nothing else.