Oliver Goodenough and Katie Taylor
Many blockchain pioneers are utopians and libertarians. Stephen Tual, one of the developers of the infamous blockchain investment fund The Dao, has argued that blockchain activities are not bound by laws and regulations but rather by “the code.” The idea has its appeal. After all, the United States legal system is an intrusive, centralized, and hierarchical organism, whose rules on things like securities involve costly and restrictive compliance. Furthermore, the fit of the legacy system’s approaches to innovative developments like blockchain is at best imperfect, and at worst nonsensical.
Existing outside the reach of such legacy law is the dream of any company or industry that’s innovating rapidly, especially one that not only thrives on disrupting the status quo but is also deeply committed to the equity of decentralization.
The problem is that while they may not be interested in recognizing the legal system, the legal system is definitely interested in recognizing them – but within the existing framework. Courts are focused on an organization’s legal structure, not on the technological underpinnings of a business or its transactions. If there is a challenge to an action taken or not taken by a blockchain entity (and inevitably there will be), the legacy legal system will jump in, saying “hey, we have a box for that — if you’re a for-profit joint enterprise with no other specified format, we’re going to call you a partnership. Congratulations, everyone involved is jointly and severally liable for everything.”
That’s not the result any enterprise wants.
Companies operating on the blockchain can try to thumb their noses at the legal world, but this invites eventual disaster. As the Clash song reminds us, “I fought the law, and the law won.” Responsible innovators need to reconcile the experimentation and openness of the blockchain and DAO approaches with the traditional structures of the legal system, in the process, setting themselves up for a more secure future.
When the State of Vermont established blockchain-based LLCs (BBLLCs), its aim was to create a flexible law that would recognize a broad range of online-style governance while at the same time providing a limited liability format desirable for entities. BBLLCs create a bridge between blockchain experimentation and the legacy formats that the law recognizes by allowing a blockchain entity to elect to be structured as a Limited Liability Company.
Why does that matter? As the name suggests, a BBLLC provides a shield against the vicarious liability that could attach to participants in a DAO or distributed ledger that falls into the partnership default trap.
Consider another area where planning can help: taxes. If the members in a partnership reside in multiple countries, United States tax law may view the structure as a pass-through entity that requires them all to file as taxpayers in the US as well as in their own countries – a major disincentive for global participation. The United States has addressed this dilemma by permitting many organizations to elect treatment as a C Corp, which can break that inadvertent US tax presence, but it needs to be an intentional step. A company established as a BBLLC could benefit from that election.
The BBLLC law has also clarified the fiduciary duties that participants owe each other, expressly permitting a single individual to have both a participant role and a contracting role. Thus, someone (or some entity) could be a member from the standpoint of managing the enterprise and an independent contractor from the standpoint of billable work.
This works particularly well for a company like dOrg, a cooperative of DAO development freelancers that relies on the sharing economy. dOrg is also the first known DAO company in the US to obtain legal status by becoming a BBLLC.
The blockchain provides an incredible opportunity for changing the way organizations operate. There is an explosion of thinking about how to structure productive interaction, how to bring people together to accomplish something. In terms of company formation, the blockchain is allowing a whole new universe of ways to structure things: more loosely, with more participation, where people are polled immediately, where an entity can accumulate votes, assign different values to things, or distribute rewards automatically. Things that used to be hard to do in terms of direct tracking of participation are now made easy.
But if those organizations exist outside legacy legal frameworks, these innovative companies could find themselves forced into structures they didn’t choose with results that are disastrous for their continued existence. Don’t fight the law – find a way to engage it intentionally, and take advantage of opportunities like the Vermont BBLLC that will help you mold the law to support the innovation you are so good at creating.