Legal and compliance considerations in the operation of a Web3 structure
Author: Salome Bernhart
The increasing legal scrutiny of DAOs highlights the importance of authentic decentralization. In the current environment, merely wrapping a DAO in one or more legal structures without achieving true decentralization can result in serious legal consequences. The distinction between a genuine DAO and a “fake” DAO, which only mimics decentralization, has become crucial for legal protection. However, current regulations do not provide clear guidance on how to make this distinction.
Compliance and long-term viability of a DAO involve dispersing decision-making authority and resource allocation among a wide range of participants. This not only bolsters the organization’s legitimacy, but also reduces the likelihood of legal issues arising, and in many cases improves Tokenomics.
DAOs must carefully consider the legal wrappers they choose. Legal structures can offer varying levels of protection and compliance depending on the jurisdiction in which they operate and the reason they are being used. Therefore, it is crucial that DAOs consult with legal experts to determine the most suitable legal wrappers for their specific circumstances. Regrettably, the majority of legal advisors tend to specialize in a single jurisdiction, while the inherent nature and reach of DAOs are global in scope. This presents a challenge in locating highly skilled legal professionals who possess not only a deep understanding of blockchain technology but also comprehensive expertise in international law.
A Shift in Legal Perspective
The legal landscape surrounding DAOs has shifted significantly over the past few years. MiCA regulation is currently a hot topic in the space, and it’s crucial for web3 structures to understand its parameters. The Hong Kong Monetary Authority (HKMA) issued a discussion paper on crypto-assets and stablecoins, inviting views from the industry and public on the relevant regulatory approach. In the U.S. lawmakers have so far failed to get a comprehensive policy framework relating to crypto and digital assets passed, leading to what many are calling a “war” between the industry and regulators.
The Markets in Crypto-assets (MiCA) regulations are part of a comprehensive legislative proposal introduced by the European Commission to provide a harmonized regulatory framework for crypto-assets across the European Union (EU). The aim of the MiCA regulations is to promote innovation, protect investors, and maintain financial stability by addressing potential risks associated with the use and trading of digital assets.
The MiCA regulations cover a wide range of aspects related to crypto-assets, including their issuance, trading, and service provision. They establish clear definitions for different types of crypto-assets, such as asset-referenced tokens, electronic money tokens, and utility tokens, and outline specific requirements for each category. The framework also addresses aspects like anti-money laundering (AML), know-your-customer (KYC) procedures, and the licensing and supervision of crypto-asset service providers. Furthermore, it includes provisions related to stablecoins, with a particular emphasis on significant asset-referenced tokens and electronic money tokens, which may pose systemic risks.
In Europe, crypto projects must ensure compliance with GDPR and carefully assess their data collection, processing, and storage practices, and implement appropriate measures to protect personal data.
What about NFTs?
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The categorization of NFTs under the proposed MiCA legislation is currently unclear, leading to uncertainty for issuers and businesses involved in NFTs. While certain provisions imply that NFTs should be outside MiCA’s scope, another provision suggests that if NFTs are part of a sizable series or collection, their non-fungible status could be questioned, possibly placing them under MiCA. This would subject NFT collection issuers to the same disclosure and compliance requirements intended for financial instrument issuers, and those building NFT collection marketplaces, custodians, or aggregators could be deemed MiCA crypto-asset service providers.
After all, it remains unclear whether a standard NFT profile-picture collection will be deemed to have been issued in a sizable series or collection by regulators. Moreover, this raises interesting questions regarding technology neutrality, particularly in instances where NFT collections represent tickets, in-game assets, audio or text files and digital autographs as they may be considered regulated financial instruments in the token form under MiCA, but not in their analogue or existing digital versions.
Prioritise innovation in a (today’s) legally compliant way
While Web3 prioritizes innovation and creativity, it cannot overlook the importance of operating legally. Companies will be hesitant to interact with Web3 projects that do not have a legal structure, and this limits DAO’s growth potential.
Every DAO needs to decide how compliant they wish to be and which legal wrapper(s) would best serve their needs. While some DAOs may choose to remain regime-less, others may opt for a more traditional legal structure that enables them to bridge the gap between the virtual and physical worlds. See further sources here from a16z and from Paradigm.
In the pursuit of legal compliance, it’s crucial not to impair members’ privacy, DAO-2-DAO integrations, growth, and innovation by adding legal friction points or bottlenecks. Any legal structure should not change the current relationship between the governance framework and its existing ecosystem, and should not create any impediments to the evolution of the protocol or add stress to the current governance model.
Having a legal framework provides a sense of security, can help attract more investment and facilitate partnerships, which in turn brings more safety and value to its contributors. Quality contributors are more likely to join Web3 structures with a clear legal framework, as it protects their interests, provides legal recourse in case of any disputes, and facilitates interaction with other companies and institutions.
In conclusion, by embracing transparency, accountability and a healthy dose of legal expertise, Web3 organizations can traverse the winding path toward financial sustainability with confidence. As we continue to innovate and push the boundaries of what’s possible in the crypto space, it’s essential to remember the importance of enjoying the journey and celebrating our achievements along the way.
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Disclaimer: This article does not constitute professional, legal, tax, or financial advice. All content is provided solely for informational and educational purposes. Consider seeking independent professional advice on financial, tax, legal, and other matters. The information collected in this article might not reflect the most recent laws. We decline any obligation to update this document.
