Blockchain networks and decentralized applications (dApps) operate autonomously without the need for human intervention and centralized services for their storage and operation. However, they still require a unique approach to legal structuring, providing a legal framework for them to interact with the real-world business environment.
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The Need for Legal Structuring in Blockchain Networks and dApps
Despite their decentralized nature, blockchain networks and dApps require legal frameworks for several reasons, which vary depending on the project's development stage. The main factors contributing to the need for legal structuring include:
- On-chain and off-chain interaction: Blockchain networks on-chain need to interact with the off-chain world to execute tasks and responsibilities, such as signing documents, fulfilling KYC and AML requirements, and interacting with payment systems and exchanges.
- Legal liability for individuals: People are behind every blockchain network and dApp, including founders and network participants such as DAO members. They need protection from legal liabilities. Legal structuring aims to establish layers between founders and network participants, protecting them from potential legal liabilities by distributing responsibilities among separate companies.
- Decentralization: Legal structuring enables the ownerless and permissionless structure of a blockchain network or dApp by transitioning from a centralized entity to a non-beneficiary entity within the incorporation setup.
We will now explore the various responsibilities and tasks across different stages of a project's life cycle, which require "legal bridges."
Early Stage (Pre-Launch):
At the beginning of a protocol's development, a small group of founders typically works in a centralized manner.
Responsibilities during this stage include:
- IP rights and trademark registration: A company holding all rights to IP and the trademark
- Operations: A company holding a fiat bank account and paying operational costs, such as service agreements or NDAs with employees and partners
- Salaries: A company that hires software developers, sets up a work environment for payrolls, and pays salaries
- Fundraising: A company that signs fundraising documents with investors, raises equity during early-stage fundraising, and is accountable for investors' due diligence
→ To fulfill these responsibilities, the first step in incorporating a blockchain network is setting up a Developer Company (DevCo/DevLab).
Mid Stage (Launch) - US projects only
The mid-stage encompasses the period leading up to the protocol's launch, as the project approaches the Token Generation Event.
Responsibilities during this stage include:
- Token Issuance: A company in a crypto-friendly jurisdiction that issues and holds the tokens
- Token Fundraising: A company that signs later-stage fundraising documents, such as Token Sale Agreements or SAFTs, and issues tokens to investors, advisors, and team members
- Token Listings: A company that signs documents, OTC deals, and fulfills all KYC/AML requirements for listings on centralized exchanges
→ To fulfill these responsibilities, the second step in incorporating a blockchain network is setting up an SPV (Special Purpose Vehicle) or Token Issuer Company.
Later Stage (Launch & Post-Launch):
The final step of incorporation, typically established shortly before the launch and most relevant post-launch, involves setting up a legal DAO wrapper in the form of a foundation to hold the treasury and enable network decentralization.
Responsibilities during this stage include:
- Personal Liability: A company that aims to limit and protect DAO members from judicial, tax, financial, and other liabilities for the activities
- Treasury Management: A company that ensures compliance with DAO treasury management procedures and guarantees AML & KYC procedures for the issuance of grants from the DAO Treasury
- Decentralized Governance: A company that sets the rules on voting rights and governance of the DAO
→ To fulfill these responsibilities, the third step in incorporating a blockchain network is setting up a Foundation (Company).
Conclusion
Legal structuring is crucial for blockchain networks and dApps to safely and effectively interact with the real-world business environment.
By establishing a Developer Company, an SPV or Token Issuer Company, and a Foundation during different stages of a project's life cycle, these protocols can protect individuals from legal liabilities, manage financial and operational responsibilities, and maintain decentralization, all while ensuring compliance with relevant regulations.