Worldwide roundup: Best countries for DAO incorporation
Selecting the proper jurisdiction can have critical consequences on the legal, regulatory, and operational aspects of your DAO registration. It can directly influence factors such as taxation, liability protection, investor confidence, and overall compliance with local laws. In the following article, we’re going to take a look at what DAO Incorporation is and its importance when it comes to choosing which country or jurisdiction to settle in.
Importance of choosing the right jurisdiction for incorporating a DAO
First of all, let’s dig into that new-tech heavy, blockchain-inducing, and on the lips of everyone’s acronym — DAO.
DAO stands for Decentralized Autonomous Organization. It is an organizational structure that operates using smart contracts and blockchain technology — without the need for a central authority or traditional management. It’s the newest trend and one that is rapidly getting a lot of traction due to its many benefits. In a DAO, decisions, and actions are executed based on predefined rules and algorithms, and the governance is distributed among its members or token holders — there is no ONE Big Brother or CEO but a group and one that has to abide by previously stated guidelines and structures. There are no biases, nor are there any personal issues involved.
Let’s break down what to look for when choosing which jurisdiction to choose when creating a DAO:
- Legal Recognition: Check to see if the jurisdiction – or country – formally recognizes DAOs and if they have regulations in place to facilitate their operation.
- Regulatory Environment: Evaluate the regulatory oversight and compliance obligations in the chosen jurisdiction as some may have strict rules and guidelines that require companies to adhere — checks and balances like reporting, auditing, or licensing criteria.
- Governance Structure: Contemplate the flexibility available for establishing the governance mechanisms of the DAO. Some jurisdictions are more flexible and dynamic than others. Some countries are their core are more open to the idea and have carefully studied the issue.
- Tax Implications: Examine the jurisdiction’s tax policies to see if they are beneficial so that you can structure your DAO’s finances optimally and increase its earnings.
- Operational Flexibility: Examine the laws and regulations that some regions may have in various practical areas of running your business — and note how they can impact operational flexibility.
- Jurisdiction Reputation: Consider the reputation of the region with regard to its stability, legal system, and business-friendly climate. Understand that some countries are politically powered-kegs, today’s regime might be friendly to DAOs while others might very well label their tools as “imperialist oppression” or some nonsense like that.
- Jurisdiction Expertise: Take into account the availability of DAO’s specific legal and financial expertise in the chosen jurisdiction to guarantee proper guidance throughout the DAO’s incorporation.
Criteria for ranking DAO registration-friendly countries
The standards for classifying countries as DAO-friendly can change based on the company’s and the analyst’s perspective and objectives.
Here are several factors to consider, and the ones we took into account when classifying jurisdictions further down below:
Legal system
A country will draw more initiatives and investments if its DAO regulations are clear, transparent, and advantageous. Some are rather easy to follow — others are a mismatch of tech jargon that not even the policy-makers understand.
Government support
DAO-friendly countries are those that actively encourage and support the expansion of DAOs through policies, rules, and initiatives.
Tax policies
Countries with favorable tax regimes for DAOs can incentivize their establishment and operation within their jurisdiction.
Regulatory stability
Countries that consistently regulate blockchain technology — provide continued assurance to DAOs operating within their borders and promote the long-term expansion of the industry.
Technological infrastructure
DAOs would be more drawn to a nation with a strong technological infrastructure, such as fast internet, consistent electricity, and sophisticated blockchain architecture.
International cooperation
Synchronized rules for DAO activities across borders can be developed by countries that actively participate in international talks about blockchain regulation and work with other jurisdictions.
Tax regulations
Tax laws that are sympathetic to DAOs stimulate the growth and operation of these organizations within their borders.
Access to funding
A DAO-friendly country would have a supportive financial ecosystem, with access to venture capital, crowdfunding platforms, and other funding sources that understand and embrace the concept of decentralized organizations.
Community engagement
A country that promotes a thriving and active blockchain and cryptocurrency ecosystem, along with networking events, hackathons, and educational initiatives, is considered favorable to DAOs.
Profits
Consider a “for-profit” DAO, if you want to receive earnings and distribute them to DAO members. Otherwise, consider a “non-profit”.
Token sale
Depending on the country, some public sales would require a VASP – Virtual Asset Service Provider – authorization to operate in the virtual asset industry.
KYC requirements
Some countries have higher KYC – know your customer – requirements than others. What exactly are KYC? KYC refers to a company’s regulations and processes when it comes to identifying illicit activities within their customers and businesses that they do, well, business with. Most business and financial institutions must adhere to some sort of it in order to verify the identity of their customers. These requirements are implemented to prevent money laundering, fraud, terrorist financing, and other illicit activities. KYC is a critical part of a company’s anti-money laundering – AML – and customer due diligence – CDD – procedures. Some countries are more lenient when it comes to these policies — in most cases giving companies a lot of leeway when it comes to the people they do business with. To put it mildly, some countries are well aware of the type of riff-raff they help out — and have no other choice but to do business with them.
Best countries for DAO incorporation
First of all, a big disclaimer on our part — It’s important to note that this article was written in the second quarter of 2023. This means that the information provided is accurate up until this cut-off date. It’s important to do your due diligence and update yourself and this info in order to be fully informed.
Now, let’s look at some of the best countries and jurisdictions out there for this type of business structure.
The Marshall Islands
- Stance on DAOs: The Marshall Islands has passed a new law to confer legality on DAOs.
- Legal framework: The Decentralized Autonomous Organization Act of 2022 gives DAOs the right to be registered as corporate entities, provided they identify as a DAO LLC.
- Benefits: Minimal taxation, flexible corporate structures, and a business-friendly environment.
- Drawbacks: Many banks are still cautious about providing banking services to entities in the blockchain industry.
- Real-world example: MIDAO, which acts as the Marshall Islands Decentralized Autonomous Organization Directory, can be used by organizations that want to incorporate a decentralized autonomous organization – DAO – in the jurisdiction by adopting the WEB3 community.
- MIDAO offers a digital gateway that allows the government to conduct real-time monitoring in order to reduce the risks associated with money laundering, terrorist funding, and other illegal activities.
The United States – Wyoming
- Stance on DAOs: Embraces blockchain technology and has introduced legislation to provide a supportive environment for DAOs.
- Legal framework: The Wyoming Decentralized Autonomous Organization Supplement applies to DAOs organized under the Wyoming Limited Liability Company Act.
- Benefits: Legal recognition, protection for members from personal liability, and the ability to enter into contracts and hold assets in the DAO’s name.
- Drawbacks: Operating outside the state may require compliance with federal regulations.
- Real-world example: The American CryptoFed DAO operates as an autonomous organization focused on creating stablecoins backed by real assets such as gold and silver.
The Cayman Islands
- Stance on DAOs: The Cayman Islands foundation company has proven to be a particularly popular vehicle for use in conjunction with crypto projects and DAOs.
- Legal framework: A well-established legal framework for investment funds and corporations that could be applicable to DAOs.
- Benefits: Tax neutrality and access to experienced professionals in blockchain technology and decentralized finance.
- Drawbacks: High initial and ongoing costs, complex legal requirements, and potential reputation as a tax haven.
- Real-world example: An open-source project called Aragon uses blockchain and smart contract technology to establish autonomous groups.
Switzerland
- Stance on DAOs: Favors blockchain technology, with a supportive regulatory environment.
- Legal framework: Offers guidance from regulatory authorities such as the Swiss Financial Market Supervisory Authority – FINMA.
- Benefits: A skilled workforce, a favorable tax regime, a supportive ecosystem, and a reputation for innovation.
- Drawbacks: The costs of incorporation and ongoing compliance are high.
- Real-world examples: Ethereum, Monetas, Bitcoin Suisse, Xapo, ShapeShift, ConsenSys, and Tezos.
Gibraltar
- Stance on DAOs: Gibraltar supports DAOs and has created a regulatory framework for Distributed Ledger Technology – DLT – that supports blockchain innovation.
- Legal framework: The Digital Ledger Technology Regulatory Framework provides guidelines for the operations of blockchain-based entities.
- Benefits: A reputable financial services sector, favorable tax regime, and clear regulations.
- Drawbacks: Compliance with regulations and requirements to obtain licenses from the Gibraltar Financial Services Commission.
- Real-world example: RSK, the smart contract platform that underpins Bitcoin, has become the platform of choice.
Liechtenstein
- Stance on DAOs: Embraces blockchain technology and cryptocurrency.
- Legal framework: The Token and VT Service Provider Act – TVTG – , which provides a regulatory framework for blockchain-based activities, can apply to DAOs.
- Benefits: Access to EU and European Economic Area – EEA – markets, a clear legislative framework, and a competitive tax environment.
- Drawbacks: Requires substantial efforts to comply with TVTG regulations.
- Real-world example: The Moonscape DAO is a decentralized organization focused on fostering innovation in the space industry. It aims to tokenize assets, fund research and development projects, and establish partnerships with space companies.
Singapore
- Stance on DAOs: Singapore proactively approaches emerging technologies like blockchain.
- Legal framework: Laws such as the Companies Act and the Personal Data Protection Act may apply to DAOs.
- Benefits: A progressive regulatory approach, access to global markets, and a robust financial infrastructure.
- Drawbacks: Adherence to know-your-customer – KYC) – and anti-money laundering – AML – laws.
- Real-world example: Although not a DAO in the traditional sense, Kyber Network is a decentralized liquidity protocol.
The British Virgin Islands
- Stance on DAOs: The British Virgin Islands – BVI – shows a positive attitude towards decentralized autonomous organizations – DAOs – and blockchain technology in general.
- Legal framework: The BVI’s Business Companies Act provides a suitable structure for DAOs.
- Benefits: Tax advantages, privacy, and asset protection.
- Drawbacks: Reputation risks due to loose regulations, and lack of specific legislation.
- Real-world example: Mycelium is a decentralized autonomous organization that aims to provide financial services and support the development of cryptocurrency projects.
Panama
- Stance on DAOs: Panama has addressed the legal status of DAOs or blockchain technology through SushiDAO, the decentralized autonomous organization behind the crypto exchange SushiSwap.
- Legal framework: Panama’s business laws can be utilized to incorporate and operate DAOs.
- Benefits: Financial privacy, low compliance requirements, and asset protection.
- Drawbacks: Lack of specific legislation and reputational risks due to concerns of money laundering and tax evasion.
- Real-world example: SushiDAO, which created the DAO Foundation, Panamanian Foundation, and Panamanian Corporation.
Advice for potential DAO founders
Now, let’s give you a quick and dirty checklist of what to look for when it comes to DAO and how to properly create and launch them.
- Seek legal help: Engage with legal professionals experienced in blockchain and crypto regulations.
- Stay informed: Stay up to date with evolving regulatory frameworks and guidelines related to blockchain technology and cryptocurrencies.
- Compliance and transparency: Prioritize compliance with applicable laws and regulations, including anti-money laundering – AML – and know-your-customer – KYC – requirements.
- Engage with the community: Participate in the blockchain and DAO community, attend conferences, and join relevant forums.
- Consider legal and economic factors: Evaluate different jurisdictions based on their legal frameworks, tax implications, access to banking services, and wider ecosystem support.
