The DAO, the Curators: Evaluating and mitigating the legal risks

Working on The DAO adventure is probably one of the most exciting project a lawyer can dream of in this decade. With a small group of down-to-earth lawyers here in Switzerland and with the and teams, we designed the daolink project that will allow a contractor to legally interact with The DAO. That was already an achievement but, I have to admit, it was made a bit easier than it may sound thanks to our very pragmatic civil law in Switzerland.

As the creation token phase of The DAO is reaching its mid point, some questions arise again on the legality and the risks for the curators. Today, Gavin Wood decided to step down . While we should definitely respect his decision, we should also take this opportunity to explore some of the legal implications of building The DAO.

It was already raised that the legal status could be a problem and should be tackled with a high priority. But I do not agree that we have to accommodate with the existing boundaries before we send code on our blockchains. When it comes down to new paradigms like we did witness with crypto-currencies and now with DAOs and Smart-Contract, it is essential that, as a community, as entrepreneurs, we move ahead, building what makes sense to us.

What we learned from the Bitcoin experience in Switzerland is that laws can be very open to such innovations. Below the law, you will find layers and layers of rules and bureaucracy that might not be adapted to new practices. What is important is not trying to adapt our code to these sub-law layers. What made the difference is that we made sure we kept an open line of communication with the authorities, translating the technical language into one that they could relate to.

Here I will go through some of the questions that were raised and give options to feed in the debate of the community on how we can mitigate some of the legal risks.

Beware: this is a new territory, with new legal questions. The proposed options may or may not be the answers :-)

Is the DAO issuing securities?

When a person sends ether to The DAO, it triggers the Token Creation process. In exchange of ether, he/she is allocated a number of Tokens that represent the shares owned in The DAO. It also comes along with a right to vote on The DAOs decisions. We can say that tokens are a pure form of equity of a company who's board and CEO have been replaced by a software and a consensus governance.

Equities are considered as securities in some jurisdictions but not everywhere. In Switzerland, equity shares are included from the securities definition. In the US or UK, stock may fall into securities category but it usually happens when it is already existing. An IPO, that would be regulated by the SEC, is about selling existing shares. If we had to compare The DAO creation phase with a traditional company, we could argue that the founders are simply setting up the Initial Equity of the company by providing cash. And you don't require SEC approval to establish and fund a new company.

The main reason why securities issuance and exchange is regulated in most countries is that you have to trust a middleman that you can actually redeem them. With The DAO, a new practice is now being experimented where we can create equity and fund it without middleman, with only the code and our blockchains as witness and guarantees. Law will need to adapt.

The SEC could of course still try qualify this as a public offering or issuing securities, like other regulation bodies from other countries can also re-qualify this in any way the feel they can understand. Truth is, like with crypto-currencies, The DAO will put them in front of some fundamentals questions. In which jurisdiction is The DAO located? The SEC might not have a problem by imposing extra-territorial law, but as the main actors are in Germany, UK or Switzerland, what real arguments would the SEC have? Should regulators forbid individuals to team up together, put cash together to create a new project? They would undermine the very essence of entrepreneurship in their current legal framework.

The role of Curators

Living purely on the Ethereum blockchain, The DAO cannot judge on the reality of a proposal from contractor. This is why Curators are requested to verify if the code of the proposal actually originates from the contractor and to add the payout address of the contractor in The DAO whitelist. The role of Curators is very well explained by Stephan Tual. This role is only and purely a technical role.

The wording “Curator” is definitely misleading as Gavin Wood mentioned. However it would seem for me that any proceeding against one or several Curators would fail.

Curators are not curators. The legal definition of curator is very strict and does not match the actual scope of responsibilities of The DAO Curators. Any tribunal would have to consider this.

Curators have actually no control. The Token holders have. Even if the convicted Curator would fully cooperate, what action could he undertake to stop or even change the decision making process within The DAO? none. He is merely a technician working for the DAO.

Curators are chosen by the DAO. I believe this is the most important. The DAO has its own ability to take decisions and choose however can be a Curator. It can be easily proven that no Curator have taken any decision related to the investments done by the DAO. Again, they are a simple technical mechanism to a 51% attack by a group of Token holders.

Mitigation strategies - Proposals for DAO.LINK services

There are always legal incertitudes involved in the creation of such thing as The DAO. The entrepreneur within me would say that without risk taking there is no glory. The lawyer would answer: yes, but we can avoid some problems. Even-though it is my opinion that the current setup of The DAO and its Curators should not give any major problems, here are some proposals to mitigate some of the risks identified.

  • Renaming the Curators into Clerks

The definition simply doesn't match and is misleading. The name of this technical function should be, well, technical. A “real” Curator has been legally appointed to take care of the interests of a person. It can be held responsible for much more than a technician that receives a list of tasks to execute. Renaming this function would be an additional protection for the Curators offered by the community. The term "Clerk" could be more appropriate as it represent a person employed in an office or bank to keep records, accounts, and undertake other routine administrative duties. Changing the name to a more descriptive noun like Clerk would limit the perceived role. Any attempt to requalify the role of clerks would require any institution to justify this re-qualification. The burden of proof would lie on the institution side, not the Clerk anymore.

Based on my suggestion, team is already implementing this change.

  • Settling The DAO in a physical jurisdiction

This might be the most unusual proposition for a distributed project, but the DAO could actually look for a specific country to settle legally. Of course the code of The DAO would still overrule any local law, but it could give clarity for many institutions. It would also give guidance on what project would be seen as acceptable or not. In Switzerland, we have created the Digital Finance and Compliance Association as a self-governing body for blockchain related companies. One of the objective of the association is to lobby for blockchain friendly framework. It is already the main contact on this topic with the Swiss authorities. Following a proposal and a vote, The DAO could maybe become a member of the DFCA.

  • Mandating DAO.LINK to subcontract the Curators

With the and teams, we have established DAO.LINK to allow companies, that would not be in a blockchain economy friendly framework, to contract with smart contracts such as The DAO. We could provide the same service to individuals that would like to work for The DAO. This would create a localized work contract in Switzerland, avoiding claims that The DAO is active elsewhere. At the same time, as it was discussed in the forums already, it would give The DAO the opportunity to pay for the work of the Curators, which would strengthen the focus on the technical role of the Curator. This should take the form of a new proposal within The DAO. There would be no need to change any signatures rights in the Curator wallet or within The DAO.

  • Mandating DAO.LINK for legal services

DAO.LINK is connected to a strong team of lawyers that are already involved in bitcoin and ethereum projects. DAO.LINK is considering submitting a proposal for legal council and representation services to The DAO based on Swiss law. Payments would be decided by The DAO based on actual deliveries. This will allow The DAO to have a committed on demand support. We are looking into involving the local Law University.

With the the community and with DAO.LINK team we are already working on putting these options into proposals that will be submitted to The DAO.