SES Legal is the name which the Sustainable Ecosystem Core Unit uses for legal and regulatory topics and initiatives. In line with its vision of sustainably growing the Maker Protocol’s moats by removing barriers between decentralized workforce, capital, and work. SES bootstraps a number of projects, some of which are of legal nature. This is the first proposal branded by SES Legal, but expect more content coming from SES, our incubees, and our grantees.
After the dissolution of the Foundation, all DAO active members will be exposed to new layers of legal and regulatory risk. Active participants such as Core Unit contributors or facilitators and developers are exposed to different layers of liability risk, especially when acting outside a legal entity (whose main purpose is to limit liability of its members).
SES Legal has identified the risk of key actors being the target of a legal or regulatory action as likely and potentially severe. Additionally, there is a necessity of including legal feedback in the DAO collective decision process, as the recent discussions with the implementation of DSS Vest showed.
Fundamentally, the need for legal defense and advice for MakerDAO and its members is evident.
SES Legal proposes to the community the establishment of a Legal Self-Insurance Fund.
The purpose of this forum thread is to gauge the general sentiment around this idea and implement feedback from the community.
What is Self-Insurance?
Self-insurance is a well known risk management technique that consists in setting funds for compensating a possible future loss. Although in theory any damage can be self insured, typically self insurance is used when significant and infrequent losses are expected and when risk can not be transferred through traditional instruments such as insurances.
Why does MakerDAO need protection through a self-insurance fund?
Traditional corporate instruments to transfer these risks such as D&O insurances are practically unavailable in crypto, and also not directly applicable in the novel context of DAOs. Crypto proficient legal advice is expensive and scarce in the market. The risk of legal or regulatory action against a DAO member is likely and potentially severe. These risks also represent a bottleneck for attracting new talent to the DAO.
What risks can be covered?
The fund can be structured in three layers:
In a first layer, the Self Insurance Fund can cover legal costs of defense if a DAO member is the target of a lawsuit or regulatory action.
In a second layer, the fund can cover economic damages to third parties ordered by a Court of Justice as well as fines and penalties imposed by an administrative authority.
In a third layer the fund can be used as a legal reserve for obtaining a legal opinion or advice in an urgent or critical matter, such as the implementation of a new technological feature or a MIP.
The first layer is less complex, so we would suggest starting with this one and then build up the other layers.
Who will be covered?
The fund should cover all permanent DAO participants such as:
a) Facilitators, contributors and permanent members of Core Units b) Delegates c) Developers
A more formal determination of personal scope of the fund will be necessary.
What are the benefits of a Self Insurance Fund?
Is a risk management tool appropriate for transferring risks of individuals interacting with the DAO. After properly structuring this fund, it is possible to use it as a first layer for other products in the insurance market to transfer the rest of the risk.
Additionally, it is a very flexible instrument that can be tailor made to cover the needs of the DAO, unlike more traditional insurance products.
How large should the fund be and which countries should be covered??
Principally, any jurisdiction where a covered person is domiciled should be covered.
However, a technical and financial study for each layer is required to determine our overall risk exposure, the coverage and the size of the fund.
Arguably the largest risk exposure but also the most complex one is in the US.
Probably it would be a good idea to start with a pilot project in a concrete jurisdiction.
How will the fund be implemented in the MIP framework?
I consider the Special Purpose Fund (MIP 55) as an appropriate framework for implementing the fund. It is high priority and narrow in scope and requests are one-off or irregular. MIP 55 explicitly states as one of the use cases legal reserves for the DAO.
- Discuss and gather feedback from community
- Hire a feasibility study to determine risk exposure, size of fund and other parameters.