I think we need to bring this conversation to the forefront of our thoughts. MakerDAO currently has no legal structure registered in any jurisdiction, notwithstanding the dissolving Maker Foundation and the Dai Foundation.
In the US, we are almost certainly likely to be classified as a general partnership, which we urgently need an answer for. There are efforts underway to create a new legal carve-out in the United States in the next month or two, but my hopes of this happening are less than 50%. If there is not appropriate language inserted into the “reconciliation” legislative process being considered in the US Congress, I suspect we will not see the required legal relief until it will be too late for Maker.
For those who are unfamiliar, a general partnership is the default organization of a for-profit, unregistered entity. This means that any individual member of that organization can be held to account for any other member for (among other things):
- Legal liability
- Tax burden
- Business obligations
We have previously discussed liability to DAO members, and begun to brainstorm ways to mitigate that exposure. It remains to be seen if there is a way to fully reduce this risk to sane levels. Just as our gymnastics with RWA have been ponderous and imperfect, I do not think we should hold out hope for a complete solution here. But we have some of our most knowledgeable minds working on it.
Given the amount of money involved, it seems only a matter of time before claims (spurious or legitimate) are brought to members of this and other DAOs. Note that the only reason the Maker Foundation was able to move litigation from BT into arbitration was due to user agreements. To my knowledge, we no longer have those user agreements in place, and is the most instantaneous way we can at least lower our risk. Someone please make my week by telling me I am wrong, and new users are somehow subject to an agreement.
Honestly, regulatory enforcement actions are likely to be the least of our worries for shared liability. Though on that front, I am hearing more and more ominous whispers about 2022 being a very litigious year for crypto. I have no special information about which protocols and companies that might impact the most.
On the topic of taxes, US history has many examples of a single member of a general partnership being forced to pay the entire tax burden of their partners. Given the current political climate in the US, desire to increase spending, and growing worry over how to pay for that, I cannot foresee Maker – which pays taxes exactly nowhere – escaping notice, perhaps in multiple jurisdictions at once. Note that the final, late deadline for last year’s tax filings in the US is about to pass in less than two weeks.
I do not know what the variation in these exposures is in other jurisdictions like the EU, UK, LATAM, and others. But in the US, the current level of exposure to legal and tax liability is off the charts due to the size, complexity, and sheer number of members in MakerDAO.
This trajectory needs to change. We need to find solutions to these problems as soon as possible, and not simply to manage our own risk. If we want to do business with highly regulated institutions, they will need to be assured that we are compliant with all applicable laws. Some solutions – like a legal wrapper for MakerDAO in some globally recognized jurisdiction – would even allow for our RWA program, which is supposed to be the next engine of growth to 100x Maker, to scale much faster and safer than is possible now. There are compelling business reasons to solve these issues, and do so decisively.
In theory, anyone holding MKR could be exposed to these risks. One can imagine a number of other connections to Maker outside of holding the tokens that could also expose an individual.
As a closing message, anyone who has not already done so may wish to limit their interactions with this and all other DAOs to be within a limited liability entity in their preferred jurisdiction. In most countries, there are simple, easy versions to set up. I conduct all DAO business through an incorporated entity, and also hold MKR tokens within an incorporated entity to limit risk. I cannot and will not give legal advice, but consider doing something similar for yourself.
Please leave your thoughts and suggestions below. This has needed urgent attention for quite a while, and we need to get in front of this.