The rise of decentralized autonomous organizations (DAOs) has corresponded with legal headaches over how to formally establish an entity that – by design – doesn’t really want to be an entity.
Now prodigious crypto backer Andreessen Horowitz (a16z) is offering a set of proposed solutions, publishing a report Thursday that says such groups may be better off settling in and paying U.S. taxes.
Thursday’s document builds on a push in October to lay groundwork with lawmakers on how to deal with DAOs. The previous research was about the legal challenges facing these investment groups, while the latest document is meant as a potential roadmap for the decisions each DAO should be making.
DAOs lock up funds on a blockchain that a group of participants can transparently direct toward some shared aim. In its latest public effort to establish a U.S. legal foundation for DAOs, a16z is arguing they need structures that “do not require ongoing real-world human activity” to meet legal requirements – possibly favoring unincorporated nonprofit associations (UNAs) and limited liability companies (LLCs).
The challenge is keeping a DAO decentralized while allowing it to meet the tax requirements and other practical demands of a business or nonprofit. Using well-trodden, offshore strategies to avoid taxes “could substantially increase the risk of global backlash,” according to the paper written by Miles Jennings, a16z’s general counsel and head of decentralization, and David Kerr, a lawyer from Cowrie who is involved with the DAO Research Collective.
“The practical benefits of U.S. domestic structures for projects with significant U.S. membership and contacts is clear,” the paper concluded, questioning whether settling into tax-free jurisdictions while the industry waits for regulations “is really the best course of action.”