Buying DAO tokens? That’s no longer risk-free: Courts might consider you a partner in the business and judge you liable for millions in hacked funds. Another legal trap may be found simply working for a DAO — and implementing community decisions that turn out to be illegal in some far-flung jurisdiction. With many DAO communities waking up to the reality that they need some sort of legal structure or “legal personality” in order to act in the real world, solutions from mimicking corporate structures to anonymously run foundations are being floated by lawyers around the world. Nothing in this article should be construed as legal advice — and not just because the law isn’t clear about any of it. Code is law? In 2021, Magazine interviewed Griff Green, whose heroic actions to thwart The DAO hack on the morning of June 17, 2016, helped save a good proportion of the 14% of Ether in existence at the time. By identifying how the exploit worked, his team of hackers worked to “steal” faster than the malicious actor, thus limiting the amount taken by the individual who discovered the error in The DAO’s code. But who did this ETH belong to? Did it belong to the 11,000 investors who had contributed Ether toward the project in the previous month? If so, what claim did they have, considering that these “investors” had handed their money to an organization without leaders or jurisdiction, governed entirely by smart contracts that operated according to the votes of investors? Or did it belong to the “malicious hacker” who simply interacted with the publicly available smart contract in a way that allowed them to withdraw Ether? Many would argue this is perfectly legal as per the “code is law” mantra. Since The DAO had no legal personality, by what law could it hope to pursue the hacker, even if they were identified? The same goes for the “investors” — how could they claim that the stolen Ether was theirs, given they made no legal agreements and signed no contracts when making their investments? Perhaps the Ether that Green’s team got a hold of was now rightfully theirs? Green acknowledges that he took “a huge risk” with the preemptive stealing of 10% of the Ether in circulation and recalls how as word spread, a multitude of legal threats poured in demanding how the recovered funds should be distributed despite the fact that “we were just normal people; we didn’t have a company.” Eventually, Green’s team returned the funds through a decentralized application. After finding Ooki DAO had capacity to be sued and served by the @CFTC, Court enters default judgment against Ooki DAO when it fails to answer. It will be interesting to see if this gets challenged and what issues will arise when the CFTC seeks to enforce its judgment. pic.twitter.com/7NsW3AHVkZ— Alex More (@UTAMore) January 18, 2023 These questions are just now beginning to be tested, with one of the first (developing) cases to emerge being that of Ooki DAO, accused of breaking the “Commodity Exchange Act (CEA) by allowing users to engage in retail commodity derivative trading transactions” without registering the platform or conducting KYC procedures. In January 2023, the judge found Ooki to be an “unincorporated association comprised of Token Holders,” which could be sued in the same way as a person or corporation — and that it could be served by posting a notice onto the DAO’s online community forum. Another recent example of pitting code against law can be found in the case of Avraham Eisenberg, who in December 2022 was arrested on the request of U.S. authorities in Puerto Rico for having run a “highly profitable trading strategy” that effectively exploited the smart contract of Mango Markets, a decentralized finance DAO — draining it of $110 million. He claimed the whole exploit was perfectly legal under the “code is law” mantra, but the FBI disagreed. The case is yet to be tested in court. Partnerships, foundations or corporate wrappers? When it comes to DAOs, The DAO can be understood as the original example upon which the concept is based. As such, The DAO is often considered an ideal example of what a decentralized autonomous organization is supposed to be: cryptographically decentralized with no real-world anchor, its operations automated by way of smart contracts, and organized by way of blockchain governance. In practice, however, “courts may interpret DAO structures as General Partnerships, which have unlimited joint and several liability for all participants,” observes Jason Corbett, managing partner of blockchain-specialized boutique law firm Silk Legal. Jonathan Turnham, a partner at Cayman Islands law firm Travers Thorp Alberga, spends 95% of his time working on crypto law and agrees that it’s complicated. He explains that, in theory, a truly decentralized DAO that functions as a decentralized exchange or metaverse project can be “a code-based business, a bunch of 1s and 0s” and does not technically have a need for a real-world corporate structure or physical business. If a DAO envisions that it might ever need to sign any type of contract, it is not code-based and, by some definitions, not a DAO at all. Source: Pexels But in his experience of advising dozens of DAOs, this model of total decentralization tends to run into trouble quickly — perhaps even in the first 10 minutes of operation. “A codebase business still needs a front end,” Turnham explains, listing real-world needs like domain names, web hosting, banking services — or hiring lawyers — all of which are very difficult to acquire and pay for as a non-registered ghost-like entity. Any DAO that needs to enter into contracts involving real estate, intellectual property or even buying the U.S. Constitution cannot simply be code-based, as they will need some type of legal personality. “You’ve got this awkward inability to bridge into the real world you know, right down to you just needing a damn credit card or bank account to be able to pay a non-crypto service provider.” “Currently, DAOs have no legal status in most jurisdictions,” says Irina Heaver, partner of Keystone Law, which specializes in the blockchain industry, and general partner of VC investment firm Ikigai Ventures. She’s talking in the context of metaverse projects that are being launched on decentralized protocols. Legally speaking, traditional companies seem to remain the main game in town. A year ago crypto twitter raised $47million in days to buy a *copy* of the United States constitution.Now we have Genesis, one of the largest crypto trading/lending desks, in need of $500 million.Feel like this one is much more important.Can someone spin up a DAO & save us?— Luke Martin (@VentureCoinist) November 21, 2022 There are of course exceptions. The U.S. state of Wyoming has recognized American CryptoFed DAO as a legal entity, and Vermont has seemingly done so as well with dOrg LLC. Oliver Goodenough, special counsel to the DAO’s law firm Gravel & Shea, commented, “We believe that dOrg is now the first legal entity that directly references blockchain code as its source of governance. Its material operations and ownership interests are managed entirely on-chain.” A Senate committee report even recommended the Australian government should soon recognize DAOs in a legal capacity, though it is yet to act on the advice. Read also Features The value of a legacy: Hunting down Satoshi’s Bitcoin Features Decentralized social media: The next big thing in crypto? Does legalizing DAOs kill what makes them special? But Sarah E. Paul, partner at Eversheds Sutherlands, is critical of the way in which the “legalization” of DAOs has rolled out, pointing out that certain provisions of Wyoming’s DAO law are “antithetical” to the basic idea that a DAO is supposed to operate entirely via smart contracts. “DAOs would have to define in the articles of organization how the members will manage the DAO, including the extent to which governance would occur algorithmically — they’re supposed to define how dispute resolution will occur, and that can’t be totally managed by smart contracts,” she says. In this sense, one may wonder whether DAOs are really a unique legal contraption at all, or whether they are to corporations roughly what registered civil partnerships are to marriage — essentially the same thing with a modern lick of paint. Heaver, in turn, argues that “the concept of a traditional company is morally outdated.” If the C-word…
US enforcement agencies are turning up the heat on crypto-related crime – Cointelegraph Magazine
In recent months, the United States government has been ramping up its efforts to crack down on criminals using cryptocurrencies...
