Crypto looks to the Caymans

by Arthur · October 31, 2022

With help from Derek Robertson

One of the most cake-in-the-sky corners of the crypto world suddenly becomes a business.

Last week, SushiDAO, the group that controls the popular crypto exchange SushiSwap, voted to convert to a complex new corporate structure that’s a little more creative: a cohesive group of two foundations and a company spread across Panama and the Cayman Islands.

For anyone following the evolution of DAOs, this is the kind of thing they were supposed to prevent, or at least replace: Their decentralized structures and collective governance were meant to changing the entire landscape of traditional ownership and control.

But DAOs have come under more legal scrutiny lately — and SushiDao’s tropical re-registration amounts to an admission of that reality.

Although DAO supporters argue that they are a new type of group that should follow new rules, regulators and the plaintiffs’ lawyers not always agree. IN some cases they have started trying to prove that some of them are just doing unauthorized economic activity and that their members are responsible for everything that goes wrong.

As a resulta cottage legal industry has emerged to register DAOs in the same tropical jurisdictions long favored by traditional corporations.

DAOs are blockchain-based groups that often delegate voting rights to holders of crypto tokens in a manner roughly analogous to the voting rights of corporate shareholders. In theory, they could shake up the way people approach all kinds of endeavors—from climate action to space exploration—by allowing large groups to coordinate online without centralized oversight. Or at least that’s what their supporters claim.

In practice, many DAOs today remain under the effective control of small groups of founders, and the largest tend to operate in the prosaic world of finance.

In the wake of the crypto market’s spring meltdown, the focus of many founders has shifted from revolutionizing finance to addressing their own legal risks. For some DAOs that began in the digital equivalent of founders’ garages—with a Discord chat and a specially issued crypto token—have meant registering as an old-fashioned company.

Since the CFTC became the first regulator to sue an entire DAO last month, alleging that it had failed to comply with commodity trading laws, climb to register has accelerated as DAO participants realize they are in uncharted legal waters, according to Nicholas Saady, a blockchain-focused attorney at Pryor Cashman.

The case has raised the prospect that legal problems could affect not just founders but anyone who bought or voted with a group’s governance symbols, signaling an urgent need for liability protection.

“It is difficult for a DAO member to know when, how, for what conduct, or under what legal theory they may be held liable,” Saady wrote in an email.

While hundreds of self-authored DAOs have incorporated in Wyoming since the government created a special category for them last year, many others will choose offshore jurisdictions such as Panama and the Cayman Islands. (SushiDAO sets up entities in both.)

Some DAOs have been drawn specifically to a unique entity offered in the Caymans, called a foundation company, because it offers a legal structure without an owner. But the legal protections that companies can offer DAOs remain untested.

And while American founders can run from regulators, they can’t hide for longaccording to Max Dilendorf, a New York lawyer who specializes in crypto issues.

Dilendorf said that long before crypto existed, US regulators proved they could pierce the offshore corporate shells used by US tax evaders. Similarly, he said that if US regulators go after the DAO’s offshore foundations, they will be able to show that many of them remain under the effective control of founders who can be held accountable for the DAO’s activities.

“When I hear ‘Panama DAO,’ I’m like, ‘OK, really?'” he said. “This structure will not survive through a discovery phase.”

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Dilendorf said his skepticism has been reinforced by the engagement letter he has seen drawn up by law firms offering offshore DAO incorporation services. The letters, he said, lacked assurances that the structures would pass muster with US regulators.

“What do you guarantee as lawyers? Nothing,” he said. “It’s not like they want to deal with the DOJ if something goes wrong.”

In this newsletter, we talk about the EU’s approach to technology regulation, and about China’s role in the global competition for technological superiority. But how do the two match up—and what does that mean for policy and political leaders trying to oversee these industries around the world?

ONE recently published study from a group of Oxford researchers attempts to answer these questions by comparing the EU and China’s approaches to AI ethics. The researchers point out that because, of course, Western and Chinese conceptions of “ethics” and value systems are very different, there are valuable lessons to be learned from seeing where the two systems do not overlap and what each may have to offer the other. .

One key finding: Both systems are ill-equipped to incorporate the kind of user-based feedback from society that many AI researchers and ethicists insist is necessary to minimize harm.

The researchers cite heavy industry’s involvement in the design of the EU’s AI law, and conversely an “ecosystem for limited interest groups” in China. They prescribe an experiment with “civic assemblies on AI representing the full diversity of China and the EU respectively”, referring to projects such as the UK’s Citizens’ Biometric Council which provides training to everyday citizens in how they can assess the use of new technology in daily life. — Derek Robertson

Although the EU may have a stronger regulatory grip on Big Tech’s reins than the US, it is not entirely without the cooperation of the industry they are trying to rein in.

And nowhere is that more evident than in the EU’s nascent AI rules — which are starting to worry some activists and technologists, like POLITICO’s Clothilde Goujard and Gian Volpicelli reported today for Pro subscribers.

As they write, the industry is involved by design and somewhat inevitably, with the AI Act “lean[ing] on industry forums, such as CEN-CENELEC and ETSIto outline the technical instructions that ensure AI systems are trained on objective data and ultimately determine how much human supervision is necessary.”

Standards groups such as those mentioned have been important conversation partners with authorities and industry to ensure that the regulations are put in place in a way that is easy meaningful technically without “favoring” either side. But as Clothilde and Gian report, many researchers are skeptical that ethics will outweigh simple economic calculations when deciding what the standards for AI should be.

As Michael Veale, an associate professor of digital rights and regulation at University College London, put it in no uncertain terms: AI is simply too sophisticated and powerful “to be fixed by a piece of legislation that treats it like a toy, a radio or a a piece of protective equipment.” — Derek Robertson

Keep in touch with the whole team: Ben Schreckinger ([email protected]); Derek Robertson ([email protected]); Steve Heuser ([email protected]); and Benton Ives ([email protected]). follow us @DigitalFuture on Twitter.