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How can a DAO get a Bank Account?

As new digital communities emerge, questions arise about how these autonomous communities (i.e., DAOs) can interact with traditional institutions. Here is a basic model of how this can happen in a way that preserves the autonomy of the organization.

First, a few caveats.

  1. This is just a model. It’s not going to work everywhere, or even in your situation. It’s just a way of thinking about the interface between DAOs and traditional institutions.
  2. None of this is legal advice. I am not your lawyer. Talk to your lawyer before doing any of this.

Ok, with this in mind, the model has 4 levels. Two of them are specified by the problem statement: the DAO and the Bank (i.e., a stand in for a traditional institution). The others (i.e., the “interface entity” and the “local entity”) are there because, well…a DAO can’t get a bank account. So let me outline why we need each level.

Autonomous Entity

The whole problem arises because DAOs refuse to be traditional institutions. Gabe Shapiro wrote a great article about this recently, entitled Defining Real and Fake DAOs. He went straight to the dictionary to remind us of the meaning of the word “autonomous.”:

What does “autonomous” really mean? Well, Webster’s has it quite right:

- having the right or power of self-government

- undertaken or carried on without outside control

- (capable of) existing independently

So, if you want to build an organization with the blessing of the United States or some other sovereign entity, that’s great. But if you want to be a DAO, you shouldn’t ask permission from any other entity. So enough said about that. I will basically take the existence for (or desire for) an autonomous entity as a given.

Interface Entity

One way to frame the original challenge is that a DAO wants to own something (like a bank account), but other sovereign entities (like the United States) don’t even recognize it as a thing, so it can’t own anything.

So we need some kind of interface entity that has a looser definition of ownership. Two kinds of entities that can serve this purpose are: a trust and a foundation. In both cases, the entity is obligated to serve some a defined purpose or beneficiary class that enables a legal connection to a DAO without all the strict rules of ownership that come along with other entities like a corporation. Basically, a Trust or a Foundation can be set up so that it is legally obligated to act in the best interest of a DAO, or even to follow the votes of the DAO.

One reason people might be confused by this model is that there have been examples of Foundations that have controlled DAOs, not the other way around. For example, the Maker Foundation held a substantial number of Maker tokens, some of which they sold off, and some of which they eventually gave back to the community.

Basically, the Maker Foundation was a way for the founders to exert control over the protocol, not a way for the community to interface with traditional institutions. I will call the former the “Foundation as Wrapper” model and the latter as the “Foundation as Interface” model.

One way you can tell the difference is to simply ask whether the Foundation owns a substantial number of tokens that can be used to influence the DAO voting process. If the answer is yes, it’s more like a wrapper. If no, it’s probably more like an interface. Basically, the big question is “who controls who”?

In the present model, the Foundation doesn’t necessarily own any tokens. It doesn’t vote in DAO votes, it is just legally required to act on behalf of the best interest of the DAO (which can include implementing DAO votes).

Local Entity

In this model, a local entity (i.e., something like a US LLC or some other very vanilla legal entity) that is owned by the interface entity.

The reason for the local entity is that interface entities can be a bit weird. For example, they might be formed in some exotic location like the Cayman Islands or Singapore. That might make it a bit harder to get a bank account in the United States. And it’s not just bank accounts, there are complications for foreign entities that say, want to hire US employees.

In any case, if you want to do business in the US, it is better to have a very vanilla US legal entity to make everything easier. So the purpose of the interface is to create a legal obligation to the DAO in an entity that can be understood by traditional institutions, and the purpose of the local entity is to make the Bank feel better about actually doing business with the entity.

Now, if you have ever opened a business bank account recently, you likely came across a question in the onboarding form about whether the business is a “crypto business”. They ask this because banks are under heavy scrutiny to make sure they can’t be used to launder money for criminals, and traditional establishments love to think of crypto as one big money laundering scheme.

However, there is no law stating that just because an entity is owned by a foundation that has an obligation to act on behalf of a DAO, that it is necessarily a “crypto business.” The answer should depend on what the company does. So if you want a local entity to hold a bank account, it is better to limit it’s activities so that it doesn’t do things that could be used for money laundering, like holding and moving crypto assets around.

However, the company can most likely do things like write code, hold real estate, lobby governments, etc. Just don’t use it as a crypto exchange. (Note, I qualify this with a “most likely” because the rules about what constitutes a crypto company aren’t exactly written in stone).

Traditional Institution

I probably don’t need to say that much about this one. Traditional institutions are still where most of the world’s business gets done. So love them or hate them, we can’t really ignore them. And traditional institutions are subject to a boatload of regulations (like KYC/AML rules). And while these regulations make many traditional institutions squeamish about doing business with DAOs, most of them will not think twice about doing business with a non-crypto local entity (e.g., an LLC) without asking whether there is a DAO somewhere along the line of beneficial ownership.

One caveat to this is if if the local entity starts to hold or move large amounts of cash. So don’t do that. Don’t create AML risk for banks by moving a large sum of money through a local entity without a very specific purpose in the context of the business (like making payroll).



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Patent Attorney, Crypto Enthusiast, Father of two daughters