The Legal Guild finished out October with not only a successful month of community building and engagement, in depth legal content creation for the community, and internal team building, but an amazing experience at NEARcon 2021!
Attending our first NEAR Protocol official event in person was an opportunity to discuss, learn, network, and get into the weeds of the Legal concerns of the community. The two day conference in Lisbon gave our team greater insight into the inner workings of the ecosystem and unveiled the way forward for Legal development. The highlight of the conference was undoubtedly the Legalities of Web3 panel that we held in collaboration with Thomas Naegele from Naegele Attorney at Law from Liechtenstein. The main topics covered were the legalities of DAOs and the legalities of NFTs- two areas that NEAR Protocol in particular has spent a great deal of time and energy building out in an innovative manner that makes the protocol particularly groundbreaking in the Web3 space.
To begin with, we aimed to clarify for the community exactly how a DAO is defined in legal terms, the pattern of changing DAO regulations across the world, and the general sentiment from governments and international regulators. As the idea of DAOs and the appeal they hold becomes popularized, the problems emerging from attempted regulation get messy.
In the first few minutes of the panel, Santiago Chamat, founder and executive director of Legal Guild, dove into how DAOs are changing the way in which we are connecting and understanding governance within communities.
Trust has always been a core component for organisations to function. One of the novelties introduced by DAOs is that they don’t need trust to operate: their rules are clear and well known by its members, and any changes will require the majority of votes to materialize. Those votes, since they are also happening in the blockchain, ensure that no other third parties or intermediaries are needed.
In the NEAR protocol community, filled with newly onboarded Web2 users and veteran Web3 developers alike, we first aimed to clarify what exactly a DAO is:
“The entity created by the deployment of an autonomous and self-executing software running on a distributed system that allows a network of participants to interact and manage resources on a transparent basis and in accordance with the rules defined by the software code”- DECENTRALIZED AUTONOMOUS ORGANIZATIONS (DAOs) IN THE SWISSLEGAL ORDER- Sven RIVA
To put this in simpler terms for the panel audience, it means that a neutral, automated third party is the sole overseer of organizational decision making and interaction- no hefty boss or queen bee- only a self executing software coded to form a structure and framework for community governance.
Breaking this down even further in the short 20 minutes of DAO discussion, we clarified that when we reference “entity created by the deployment of software,” entity is defined as “Something that exists separately from other things and has a clear ID of its own”- AKA the boss software taking place of a human equivalent. This software, once deployed, becomes autonomous from any other entity or legal natural person. The software executes itself according to encoded rules and enforces the resulting outcome. Finally, the desired outcome of any DAO structure is that participants can make collective decisions within the DAO in accordance with its governing rules- the existence of the community itself is not dependent
on one particular participant.
So, how does DAO regulation and creation relate to the NEAR Protocol community? First and foremost, the NEAR ecosystem is truly global, with users, applications, and creators dotted across the globe. With such an expansive and diverse network co-operating in tandem and transacting likewise, the rules of regulation and taxation get inevitably messy. During the panel, Legal Guild lawyer Anibal Suriel dove into the different rules based on jurisdictions, from Monaco to Switzerland. For example in Malta, the legal concept of ITA was introduced- or “Innovative Technology Arrangements and Services” (ITAS). Smart Contracts and DAOs can be classified under this concept definition of an ITA. The Maltese solution was to create a legal link between an ITA and a natural identifiable person, who is referred to as the provider of Innovative Technology Services. In this way, according to the Maltese government, a DAO is its own entity but also connected to a real human. This means that transparency and accountability are guaranteed as the provider is identifiable by investors, authorities and is liable for the activities of the ITA.
Throughout the panel, we were fortunate to have the live expertise of Thomas Naegele from Liechtenstein, a blockchain law expert. Instead of nitpicking the weeds of DAO governance, Thomas’s advice is to reflect on what the technology is able to do, and operate according to majority decisions as programmed in the smart contract while keeping jurisdiction regulations in mind. Further, he recommends that a good concept would be to use the corporate as a channel model but reflect the voting mechanism that is so unique to DAOs and smart contracts. Using these two tools, you could address the issue of liability within the community as well as allow the consensus algorithm to decide what is placed on the table. Ultimately, the key to running a successful DAO is to understand what the tech is all about! Liability is a key issue for a DAO or entity, so staying educated and aware is vital.
Moving on from the messy world of DAOs, the much more intriguing and possibly more complex intersection was the discussion about the Legalities of NFTs. Art truly meets tech during this portion of the panel, where we both fielded and asked questions that didn’t seem intuitive to most already within the world of NFTs. Anibal helped to clarify the definition of an NFT: unique cryptographic tokens stored on a decentralized blockchain that is capable of representing ownership of goods (most commonly digital artworks).
The key here, and what pulls NFTs into the legal realm, is that an NFT is an undisputable record of authenticity and ownership of the token. Each NFT is unique and cannot be deleted or counterfeited (notwithstanding another NFT could be created by copying and re-minting the same underlying artwork). How authenticity and ownership are defined once again depends on the location you are operating from!
Anibal emphasized that in recent years, some commentators have begun to draw parallels between NFTs and initial coin offerings (ICOs). The Securities and Exchange Commission has been scrutinizing ICOs and token offerings for years. Depending on the specific characteristics of the NFT and offers and sales, certain NFTs could also be classified as securities, triggering regulatory and filing requirements and potential liabilities. Like most other digital assets, the primary test to determine whether an NFT would be security is the Howey Test: a transaction is deemed an investment contract if “a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.”
When it comes to creators being taxed on their work, confusion is once again amassed. This is a key issue for owners with a permanent home abroad whose assets may fall outside the scope of a specific country tax framework. The common view is that cryptocurrencies are taxed in the place where the beneficial owner is resident and they may take the same approach with NFTs, especially where the underlying artwork is in digital form, although the law is unclear on this point. As the law continues to develop and form, the Legal Guild team is ready to unweave, simplify, and share the information pertaining to NFT taxation.
Possibly the most valuable connection between NFTs and law comes at the avenues of rights of attribution (right to claim authorship) and integrity (right to prevent mutilation or destruction, or to disclaim authorship as a result). Because purely digital works are relatively new to the fine art world, the extent to which moral rights apply to them is also unclear. Further, NFTs have not yet been tested against international standards (Berne Convention). An artist might, for example, insist on the ability to claim or disclaim authorship, or prevent the destruction of the work―and with an NFT it is unclear what that might mean. Moral rights for works created today have the same duration as copyright, which is quite long (author’s life + 70 years). This duration will likely long survive current assumptions about the technology used to deploy NFTs.
In concluding the Legalities of Web3 panel, we were struck by audience engagement as well as the intrigue circulating around Legal Guild aiding the NEAR Ecosystem to navigate the rapids of crypto law. Despite only having time to cover DAOs and NFTs in this panel, our resources, documentation, use cases, and articles continue to dive deeper into various topics relevant to the community. To view the full recording of the panel, click the link below, and don’t hesitate to reach out to us on our social media or join our Telegram chat!