Tech

Crypto looks at the Cayman Islands

With help from Derek Robertson

One of the most chic corners of the crypto world suddenly there is a corporate.

Last week, SushiDAO, the group that controls the popular crypto exchange SushiSwap, voted to transform itself into a complex new corporate structure that is a bit more creative: an interconnected group of two funds and a corporation located in Panama and the Cayman Islands.

For those following the development of the DAO, this is what they should have prevented or at least replaced: Their decentralized structures and collective governance were intended to change the entire landscape of traditional corporate ownership and control.

But recently, DAOs have come under closer legal scrutiny—and SushiDao’s tropical re-registration is a concession to that reality.

Although DAO proponents argue that they are a new type of group that must play by new rules, regulators, and attorneys for the plaintiffs do not always agree. U some cases they began to try to prove that some of them were simply conducting unauthorized financial activities and that their members were responsible for anything that went wrong.

As a resulta cottage legal industry has sprung up to register DAOs in the same tropical jurisdictions that have long favored traditional corporations.

DAOs are blockchain-based groups that often delegate voting rights to crypto token holders in a way that is roughly analogous to the voting rights of corporate shareholders. In theory, they could change the way people approach all kinds of endeavors — from climate change to space exploration — by allowing large groups to coordinate online without centralized control. Or at least that’s what their fans claim.

In practice, many DAOs today remain effectively controlled by small groups of founders, and the largest ones tend to operate in the prosaic world of finance.

After the spring collapse of the crypto market, the focus of many founders shifted from revolutionizing finance to addressing their own legal risks. For some DAOs, which began in the digital equivalent of their founders’ garages – with a Discord chat and a custom-issued crypto token – meant registering as an old-fashioned corporation.

As the CFTC became the first regulator to sue the entire DAO last month, alleging that it failed to comply with commodity trading laws, fight to register According to Nicholas Saadi, an attorney at Pryor Cashman, blockchain has picked up speed as DAO participants realize they are in uncharted legal waters.

The lawsuit raises the prospect that legal problems could affect not only the founders but anyone who purchased or voted with the group’s management tokens, signaling a dire need for protection from liability.

“It is difficult for a DAO member to know when, how, for what conduct, or under what legal theory they may be held liable,” Saadi wrote in an email.

While there are hundreds of self-described DAOs registered in the state of Wyoming since the state created a special category for them last year, many others are flocking to favored offshore jurisdictions such as Panama and the Cayman Islands. (SushiDAO configures objects in both.)

Some DAOs have been drawn, in particular, to a unique entity offered in the Cayman Islands, called an incorporated company, because it offers a legal structure without an owner. But the legal protections that corporations can offer DAOs remain untested.

And while American founders may be on the run from regulators, they can’t hide for longaccording to Max Dillendorff, a New York lawyer specializing in crypto.

Dillendorff said that long before cryptography existed, US regulators had proven they could pierce the offshore corporate shells used by US tax evaders. Similarly, he said that if U.S. regulators pursue offshore DAO funds, they will be able to show that many of them remain under the effective control of founders who can be held accountable for the DAO’s activities.

“When I hear ‘Panama DAO,’ I think, ‘OK, really?'” he said. “This structure will not survive the opening phase.”

Dillendorff said his skepticism was heightened by an engagement letter he had seen drawn up by law firms offering offshore DAO registration services. In the letters, according to him, there are no assurances that the structures will be inspected by US regulators.

“What do you guarantee as lawyers? Nothing,” he said. “It’s not like they’re going to deal with the Justice Department if something goes wrong.”

In this newsletter, we talk about the EU’s approach to technology regulation and China’s approach role in the global competition for technological superiority. But how do they stack up against each other, and what does this mean for political and policy leaders trying to control these industries around the world?

A a recently published study a group of Oxford researchers is trying to answer these questions by comparing EU and Chinese approaches to the ethics of artificial intelligence. The researchers point out that while of course Western and Chinese concepts of “ethics” and value systems are very different, there are valuable lessons to be learned from discovering where the two systems differ and what each has to offer the other.

One important takeaway is that both systems are ill-equipped to incorporate the community-based feedback from users that many AI researchers and ethicists insist on in order to minimize harm.

The researchers cite the involvement of heavy industry in shaping the EU’s Artificial Intelligence Law and, conversely, the “vested interest group ecosystem” in China. They prescribe an experiment with “civil AI assemblies representing the full diversity of China and the EU respectively,” citing projects such as the UK Civic Council on Biometrics which provide training for ordinary citizens on how to think about the use of new technologies in everyday life. — Derek Robertson

While the EU may have stronger regulatory control over Big Tech than the US, it’s not entirely uncooperative with the industry they’re trying to tame.

And nowhere is that more evident than in the EU’s nascent rules for artificial intelligence — which is starting to worry some activists and technologists like POLITICO’s Clotilde Gujar and Gian Volpicelli reported today for Pro subscribers.

As they write, the industry is engaged by design and to some extent inevitably, with the AI ​​Act “skinny[ing] on industry forums such as CEN-CENELEC and ETSIto outline the technical guidelines that ensure AI systems are trained on objective data and ultimately determine how much human supervision is necessary.”

Standardization groups such as those mentioned have been important interlocutors with government and industry to ensure that regulations are introduced in a way that simply makes sense technically, without “favoring” either party. But as Clotilde and Gian report, many researchers are skeptical that ethics will trump simple financial calculations in deciding what AI standards should be.

As Michael Veal, associate professor of digital rights and regulation at University College London, put it: AI is simply too complex and powerful “to be enshrined in legislation that treats it as a toy, a radio or a piece of security equipment”. — Derek Robertson

Stay in touch with the whole team: Ben Schreckinger ([email protected]); Derek Robertson ([email protected]); Steve Heuser ([email protected]); and Benton Ives ([email protected]). Follow us @DigitalFuture on Twitter.

Ben Schreckinger covers technology, finance and politics for POLITICO; he is a cryptocurrency investor.

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https://www.politico.com/newsletters/digital-future-daily/2022/10/31/crypto-goes-to-the-caymans-daos-00064315

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