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Trust Law/Level IX · Trusts on chain/9.2 Tokens and real-world assets/Lesson 6

DAOs, purpose trusts and legal wrappers

Why a DAO with no legal form can expose its participants, what courts said in the Ooki DAO and bZx DAO cases, and how DAO LLCs, foundation companies and purpose trusts are used as legal wrappers.

Education, not legal advice. Trust law changes from country to country and state to state, and the right structure depends on your situation. Anything you sign should be drafted or reviewed by a qualified lawyer where you live.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. Cheapest wrapper: a Wyoming DUNA needs no state filing, only an optional $5 agent statement, and members are not liable merely for membership (W.S. 17-32-107). Catch: it needs at least 100 members and may not distribute profits to members.
  2. For smaller groups, a Wyoming DAO LLC costs $100 to file and gives members LLC limited liability, with a registered agent required. Catch: annual reports are due each anniversary month, unpaid ones risk dissolution after 60 days, and federal securities and tax law still apply.
  3. An unwrapped DAO risks partnership liability: in Sarcuni v. bZx DAO (2023) a general-partnership claim survived dismissal, and Ooki DAO drew a $643,542 penalty. Catch: a wrapper never covers a participant’s own wrongful acts.
  4. Offshore purpose trusts or Cayman foundation companies suit treasuries with no beneficiaries, but need an enforcer or supervisor and paid local providers. Catch: they cost far more, so they make sense only for large treasuries, and members still owe home-country tax.

MaterialsWyoming Statutes §§17-31-101 to 17-31-116, the Wyoming Decentralized Autonomous Organization Supplement (2021), free on the Wyoming Legislature websiteThe Marshall Islands Decentralized Autonomous Organization Act 2022 and the Cayman Islands Foundation Companies Law, 2017, free on the official legislation websitesLesson 6.2.5, on purpose trusts and the STAR and VISTA regimes, for background

Wonder

  1. Who is responsible for a DAO’s actions if it has no legal entity?
  2. Why can’t a trust in England usually exist just for a purpose, with no beneficiaries?
  3. How is an enforcer of a purpose trust different from a trustee or a protector?

Explore

  1. A decentralised autonomous organisation, or DAO, is a group that coordinates through smart contracts and token voting rather than a board of directors. Its legal status is often unclear and varies by jurisdiction. If a DAO has no legal form of its own, a court may treat it as an unincorporated association or a general partnership, and in a general partnership each partner can be personally liable for the partnership’s debts. This is why some DAOs use a legal entity, often called a ‘wrapper’, to hold assets and sign contracts. This lesson explains these structures and does not recommend any of them.
  2. Two US cases show the risk. In CFTC v. Ooki DAO (N.D. Cal.), Judge William Orrick entered a default judgment on 8 June 2023, holding that the Ooki DAO was a ‘person’ under the Commodity Exchange Act that could be held liable, ordering a civil penalty of $643,542 and trading and registration bans. In a separate settled order in 2022, the CFTC had found the founders of the DAO’s predecessor company liable as members of the Ooki DAO for its debts arising from the violations. Neither proceeding was a full trial of whether every token holder is personally liable.
  3. In Sarcuni v. bZx DAO (S.D. Cal.), users who lost funds in a hack sued, claiming that all holders of the DAO’s governance tokens formed a general partnership. On 27 March 2023, the court, deciding a motion to dismiss, held that the complaint plausibly alleged that the bZx DAO was a general partnership and that some defendants were its partners. That was a ruling on the pleadings, not a final finding, and the case was later dismissed by agreement of the parties in November 2023. Even so, it shows how general partnership law can reach participants in an unwrapped DAO.
  4. Some jurisdictions created DAO-specific entities. Wyoming’s Decentralized Autonomous Organization Supplement, effective 1 July 2021, lets a DAO organise as a limited liability company under Wyoming law, giving members limited liability like other LLC members. The Marshall Islands’ Decentralized Autonomous Organization Act 2022 provides for DAOs to be formed as domestic limited liability companies under its Limited Liability Company Act. The Cayman Islands’ Foundation Companies Law, 2017 allows a foundation company, a company that may cease to have members if it keeps a supervisor, and that some DAOs and technology projects use to hold assets.
  5. Purpose trusts are another route (lesson 6.2.5). In English law a private trust generally needs beneficiaries who can enforce it, and in Re Endacott [1960] Ch 232 the Court of Appeal refused to extend the narrow exceptions for non-charitable purposes. Several offshore jurisdictions allow non-charitable purpose trusts by statute, such as Cayman STAR trusts (1997), BVI VISTA trusts (2003, in force 2004) and Jersey purpose trusts (introduced in 1996). Because no beneficiary can sue, these regimes require an enforcer, a person with standing to make the trustee carry out the purpose; an enforcer is different from a protector, though one person may hold both roles.
  6. A legal wrapper changes who is liable and who can sign, own and sue; it does not change the code. If a DAO’s smart contracts are exploited, as in The DAO hack of June 2016 (lesson 9.2.5), the assets can still be lost, and the wrapper decides mainly who bears the legal consequences. Each wrapper also brings its own registration, governance, tax and reporting rules under the law of the place where it is formed and the places where its members live. Whether a wrapper protects participants depends on that law and on the facts of each case.

Key facts

  • A DAO with no legal form may be treated as an unincorporated association or general partnership, which can expose participants to personal liability.
  • In CFTC v. Ooki DAO (N.D. Cal., default judgment 8 June 2023), the court held the Ooki DAO was a ‘person’ that could be liable under the Commodity Exchange Act.
  • In Sarcuni v. bZx DAO (S.D. Cal., 27 March 2023), the court held at the pleading stage that a general partnership among DAO participants was plausibly alleged.
  • Wyoming’s DAO Supplement took effect on 1 July 2021, and the Marshall Islands’ Decentralized Autonomous Organization Act was passed in 2022.
  • The Cayman Islands’ Foundation Companies Law, 2017 allows a foundation company that can cease to have members if it keeps a supervisor.
  • Non-charitable purpose trusts, such as Cayman STAR and Jersey purpose trusts, need an enforcer because there is no beneficiary to enforce them.

Exercise nine, six, three, one

9CollectList up to 9 features of DAO legal structures described in this lesson or in a statute or court decision you are reading (some sources give fewer), such as who is liable, who can sign contracts, who can enforce the arrangement and which law governs it.
6ClusterSort them into 6 categories: DAOs with no legal form, US court decisions, DAO LLCs, foundation companies, purpose trusts, and limits that no wrapper removes.
3DistillReduce the 6 categories to 3 groups: what creates personal liability, what legal forms can limit it, and what risks remain whatever form is used.
1CrystallizeWrite 1 sentence explaining, in your own words, why a purpose trust holding a DAO’s assets needs an enforcer.

Fact check

Dates, figures and claims checked against the published sources listed below.

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