Managing DAO Treasuries
Community Considerations When Working With A Treasury
Congratulations! You’ve launched a DAO and the community now has a healthy and robust treasury, likely in your newly minted governance token. For purposes of this article, we will consider a DAO treasury worth $1,000,000 in fiat when the DAO was launched (that can be converted into other currencies).
Now what? Should the community keep the treasury entirely in its new token, or should the community consider diversifying the treasury to protect against variations in token value?
Many will address this issue as one only of an economical issue. If the coin is believed to be likely to gain value relative to other coins, then diversification does not make sense. If the coin is believed to lose value relative to other coins, then diversification makes sense.
But DAOs should consider a second issue absent guidance from regulatory authorities. If DAOs are most akin to general partnerships, then each DAO member may owe the other DAO members legal duties — the duty of care, the duty of loyalty, the duty of good faith and dealing, and the duty to disclose. Fans of DAOs may be surprised, shocked or chagrined to hear that federal law, state law or various international laws, may apply to DAOs. Nevertheless, it is prudent to consider until we learn otherwise, to consider the possibility that DAOs cannot simply contract around the law. Yes, some DAOs may be able to avoid the attention of regulators or DAO members deciding to sue the DAO, but that is not the same as not being subject to the law itself. This article will primarily address the Revised Unformed Partnership Act, although the law that may apply to any specific DAO may be different.
The Duties Partners Owe Each Other
Duty of Care — The duty to care is a fiduciary duty meant to limit a partner from engaging in grossly negligent, reckless conduct or intentional misconduct. This does not mean that any ordinary mistake is a violation of this duty. Rather, the dereliction of duty must be more substantial than a normal mistake.
Duty of Loyalty — The duty of loyalty means each partner owes the others something greater than just ordinary honesty. Rather, as Judge Cardozo once wrote in Meinhard v. Salmon, 164 N.E. 545, 546 (N.Y. 1928):
“[j]oint adventurers … the duty of the finest loyalty … Something stricter than the morals of the marketplace. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior.”
In short, this means a partner cannot: compete against the partnership (see Revised Unformed Partnership Act [hereinafter “R.U.P.A.”] § 404(b)(3)); take business opportunities from which the partnership might have prospered; use partnership property for personal gain (see R.U.P.A. § 401(b)(1)); engage in conflicted transactions (see R.U.P.A. § 404(b)(2)).
Duty of Good Faith and Fair Dealing — this duty means that each partner must deal honestly and fairly in their dealings pertaining to the partnership (see R.U.P.A. § 404(d)).
Duty to Disclose — this duty means that partners have a duty to disclose material information to other partners, even without asking. All partners have full access to books and records at all times. Information that a partner needs to exercise his rights and duties under the partnership must be disclosed to other partners without asking (see R.U.P.A. § 403).
Application of Duties to DAO Treasuries
If we start from the presumption that DAOs will be treated as general partnerships, then it becomes quite possible that DAO members, those who own the governance token issued by the DAO, will be in a fiduciary relationship with each other. In much the same way that partners in a formal general partnership (one formed under the applicable state laws) owe each other fiduciary duties.
Let us consider then whether the duties discussed above have application to a DAO’s treasury. The last two duties discussed, the duty of good faith and fair dealing, and the duty to disclose are arguably not applicable to this situation. Neither of these duties likely involve whether to diversify a DAO’s treasury. However, the duty of care and the duty of loyalty may apply to the DAO treasury decision.
Because a partner that is acting within his or her duty of care might be acting grossly negligent to not consider and propose that the DAO consider diversifying its treasury. A coin that is launched by a DAO that quickly loses it value could open a DAO up to liability that it was a gross mistake to not diversify the treasury. A prudent diversification strategy may have preserved more value for the DAO members, whether that is placed in defi options or even traditional finance options. At the very least, DAO members should give serious concern to the option to diversify its treasury.
Additionally, the duty of loyalty may be applicable because a partner acting with the highest amount of honesty might be remiss to not suggest to the DAO members that the treasury should be protected by diversifying its treasury. (That diversifying a treasury may result in taxable events for DAO community members is a subject for another day.) One would be hard pressed to dispute the fact that many DAOs issue a token that quickly loses its value (especially as early members start selling their tokens). Once this fact is recognized, a honest DAO member might be required to bring up the issue of diversification of the treasury to the DAO community itself.
DAOs are admittedly at the cutting edge of group coordination. It is entirely possible that we will see states and the federal government attempt to statutorily define them (and consequently the duties that may or may not flow from those definitions). Some DAOs may be considered partnerships, while others are not, resulting in differing duties depending on the DAO’s structure. But at the present, in the absence of regulatory guidance, I believe it is prudent for DAO members to consider that they owe the same duties as those in general partnerships. This is of course complicated by the fact that DAOs aggregate a large community, complicated further by the fact that members may be from a number of different jurisdictions, domestic and foreign.
It may be a best practice for DAO members to consider diversifying their treasury to protect its value not only because it makes good financial sense, but because DAO members owe each a fiduciary duty to do so.
