The rise of decentralized autonomous organizations (DAOs) has led to legal problems about how to formally establish an entity that doesn't really want to be one.
Now, well-known crypto supporter Andreessen Horowitz (a16z) is offering a number of proposed solutions, releasing a report Thursday that says it might be better for such groups to incorporate and pay taxes in the United States.
Thursday's document follows up on an October push to lay a foundation with lawmakers on how to deal with DAOs. The earlier inquiry addressed the legal challenges facing these investment groups, while the latest document is meant as a potential roadmap for the decisions each DAO should make.
DAOs lock funds on a blockchain that can transparently align a group of participants toward a common goal. In its recent public attempt to create a legal foundation for DAOs in the U.S., a16z argues that they need structures that "do not require ongoing human activity in the real world" to meet legal requirements-perhaps favoring unincorporated nonprofits (UNAs) and limited liability companies (LLCs).
The challenge is to keep a DAO decentralized while allowing it to meet the tax and other practical requirements of a business or nonprofit organization. Using tried-and-true offshore tax avoidance strategies "could significantly increase the risk of global backlash," says the paper by Miles Jennings, a16z general counsel and head of decentralization, and David Kerr, a Cowrie-based attorney involved in the DAO Research Collective
"The practical advantages of U.S. structures for projects with significant U.S. members and contacts are clear," says the paper, which questions whether locating in tax-exempt jurisdictions while the industry awaits regulations "is really the best way to go."
There is certainly a lot at stake for A16z in this matter. The company has been involved in DAO projects before, and last year led a funding round for Syndicate, a startup that aims to simplify the creation of DAOs and in which actor Ashton Kutcher and rapper Snoop Dogg have also invested.
Perhaps more importantly, many of the tokens a16z is invested in are managed by DAOs. As a large token holder, a16z could single-handedly influence many governance proposals and last year assembled a team - the first third-party professional protocol policy makers - to handle its voting and delegations.
UNAs, LLCs or so-called limited cooperative associations "arguably provide the best foundation on which to build decentralized operations," according to the paper, which offers a framework to help investors choose the best type of company. "This is primarily due to the great flexibility these structures offer in terms of operations and management.