RegFi Episode 65: Creating an SEC Safe Harbor for DAO Memberships
44 min listen
RegFi co-hosts Jerry Buckley and Sasha Leonhardt welcome Orrick colleague James Wigginton and John Paller, Founder of Opolis and ETHDenver, to explore how blockchain technology can be used to enable decentralized autonomous organizations (DAOs) to transform corporate ownership and governance using a limited cooperative legal format. Discussed are the benefits of DAO memberships and meetings with the SEC Crypto Task Force aimed at securing a Safe Harbor rulemaking for DAOs offered in a limited cooperative or similar legal structure.
-
Jerry Buckley:
Hello, this is Jerry Buckley, and I am here with RegFi co-host Sasha Leonardt. Our guests today are John Paller, the founder and steward of Opolis and ETHDenver, and our Orrick colleague, James Wigginton.
Today we are going to be discussing the potential use of limited liability cooperative legal structure to facilitate the adoption of blockchain-based decentralized autonomous organizations, or DAOs. Some of our listeners may not be familiar with DAOs or the Web3 movement. While the legal thinking in this area is just now taking shape, we think that these issues are worth examining because of their potentially transformative effect on the way in which some businesses will be conducted in the future, including some financial services businesses.
There’s an awful lot to cover, so I’ve asked James to set the stage by describing DAOs, the philosophy behind DAOs, and how limited liability cooperative legal structure could facilitate the use of the DAO format. So, James, thanks for joining us, and it’s yours.James Wigginton: Yeah, I’m delighted to be here, and especially with John Paller, who is a leading light in Web3. And I’d be happy to give a little bit of background on what a decentralized autonomous organization, or DAO, is. So, they go back a ways. The first DAO that we know of was made in April of 2016 on the Ethereum blockchain. And for those of you who are not familiar with Ethereum, it’s really one of the largest blockchain systems around, behind perhaps Bitcoin, at least in notoriety.
And the original DAO that was created in April of 2016 was supposed to be kind of like an investor-led investment fund. And shortly after its creation, it was hacked, there were some issues with it. The Securities and Exchange Commission ultimately said that the system for creating this DAO violated securities laws. But that was really the first shot in what became known as the DAO movement. So, what exactly is a DAO? How is it defined? There are many different ways to define a DAO, but this is the definition from the Ethereum Foundation.
They say, “A DAO is a collectively-owned organization working towards a shared mission.” So, that’s very broad. It can take many different forms, but one of the sort of common assumptions or premises of a DAO is that instead of having centralized management, instead of having, for example, a designated board of directors or a slate of officers who run the company, the premise of a DAO is that those functions can be carried out by code. They can be carried out with smart contracts.
So, instead of having a traditional corporate structure where you’ve got, let’s say, shareholders who elect the board of directors, who then choose officers to run the day-to-day affairs of the company, one of the main premises of a DAO is that you can have token holders rather than shareholders who manage the affairs of the DAO themselves and execute their wishes via a smart contract. And the smart contract is just a bit of code on the Ethereum blockchain or another blockchain that is supposed to be self-executed.
And so that is the basic structure of a DAO, and I think most people in Web3 would agree on that structure as constituting a DAO. And there are many DAOs now. In 2025, you know, nine years after the original DAO in 2016, you’ve got a plethora of different DAOs and they have a bunch of different names: you’ve got Uniswap and Lido and Arbitrum and Aave and many others, and they are primarily financially focused. Many of them are focused on lending, they’re focused on exchanging cryptocurrencies, they’re focused on staking, which is a form of validating a blockchain network and receiving rewards. So, there are many different DAOs and they have many different functions.
Now, DAOs have not been without controversy — and of course there’s been controversy since day one with the original DAO — but they continue to have issues. And what are some of those issues? Well, they are many of the same issues that we encounter in traditional corporations. So, DAOs, by virtue of having token holders, and because those tokens are often freely transferable, can be subject, just like an ordinary corporation, to capture by large token holders, the same way that a corporation could be subject to becoming vulnerable to a hostile takeover or to governance by just a handful of shareholders. So, that can happen in DAOs.
Voter apathy or token holder apathy is another issue. DAOs are premised on community governance, but sometimes the community just isn’t as engaged as we would want them to be. And so, it can be difficult to get out the vote for token holders to take part in business decisions. And in addition to that, it can be hard because there is no central authority to keep the day to day operations of the DAO running. And so, there are, I think, practical limits that we’ve discovered over time to how much a smart contract and how much software alone can do, especially for DAOs that purport to have more complicated businesses. It’s one thing to not have a board if you’re operating a very simple bit of code or a very simple business. But if you don’t have a board and you’re operating a more involved business, if you don’t have officers to operate a more involved business and get involved in the day-to-day affairs, that can be problematic. So, DAOs are still evolving, but they have many problems that are similar to what we’ve seen in ordinary corporations. And they have some problems that are a little bit unique, including that they don’t have the centralized management.
And so, the next question is, where do cooperatives come into all of this? So, part of the reason that we’re having this conversation today is to talk about how we think limited cooperative associations fit into the greater DAO picture. Well, DAOs are supposed to be owned and managed by the members of those DAOs. And we think of this as a relatively new development, but cooperatives are a system of member ownership of business that have been around for a very long time. They’ve been around for over a century. And through a process of evolution, cooperatives have provided answers or resolution to some of those problems that DAOs have today.
So, cooperatives have developed legal structures and common practices that can help solve governance issues. Unlike a typical DAO, a cooperative does have a board of directors, but that board of directors owes fiduciary duties to the members, which causes it to differ from a typical DAO with no centralized management. But in another way, it adds protection for the members of the cooperative, requiring the board to carry out the wishes and serve the best interests of the members. And so, the similarities between DAOs and cooperatives are striking, and it’s our theory that by applying the cooperative form to DAOs, DAOs can function better, they can reach a broader audience, and they can also better comply with existing U.S. securities laws.
And so, that’s a very high-level overview, Jerry, and I’ll let you and Sasha take it from here to ask more questions.Jerry: Well, thank you, and it’s a very comprehensive overview. There is so much to cover here, as we said. It’s just a lot. But I’m going to let Sasha hop in here. So, Sasha? Sasha Leonhardt: Thank you, Jerry. And James, thank you for the explanation. I think that was a nice level-setting for us.
John, to bring you into this, first off, thank you for taking the time to join us today. For those listeners who may not follow this area closely, as Jerry mentioned, you’re the founder of ETHDenver, which is the largest Ethereum-based hackathon in the world. And ETHDenver has been growing exponentially and by all measures has been a great success. Could you share what motivated you to start ETHDenver and what happens at this extraordinary annual event? Or maybe even at a baseline level, what happens at a hackathon?John Paller: Yeah, so, we started originally because, I mean, I got involved in Ethereum pretty early and I’m in Denver, Colorado, and I’m looking for people who know how to code a smart contract. And, you know, Solidity is the language, a Turing-complete language, that was essentially invented to pair along with, you know, in the development of Ethereum smart contracts and there wasn’t anybody here that knew how to do it but we had a meetup that went from about 20 people in 2016 to 400 people in the spring of 2017, and a lot of people that were there were developers but nobody really knew what to do so we were looking for a way to jumpstart that. Because the alternative is you can talk to some folks near the center of the Ethereum universe that are willing to charge you $400 or $500 an hour. You don’t even know what you want to build yet, right? I mean, there was so much greenfielding and just, who knows, just theories and ideas that, you know, that can get out of control pretty quickly and you don’t even build anything. So, like, how do we actually make that happen?
So, we decided to have a hackathon and I reached out to a few people that I had been introduced to. So, by pure happenstance, in January 2014, I had met sort of a big Russian dude at an entrepreneur’s conference in La Jolla, California, by the name of Dima Buterin and it so happens that he’s the father of Vitalik Buterin, the founder of Ethereum. Now, I didn’t know anything about Ethereum at the time. We talked a little Bitcoin, but not much. We stayed friends on social media. And about a year and a half later, I started seeing the white paper and, you know, just through his social posts. And I got curious and I saw the Ethereum token presale, you know, like the actual ICO of Ethereum and that was totally eye-opening. You’re going to raise $15 million in two hours. Like what? You know, I had been in venture capital and in startups, and I’m like, it blew a sprocket for me. I had no concept of any of this.
So, just slowly but surely, I got sucked down the rabbit hole. And I even reached out to Dima at one point and said, “Hey, I’ve got some ideas of how to bring employment and payroll on chain” and all of these really early and somewhat naive ideas. And Vitalik was kind enough to actually spend an entire afternoon with me talking about my use case ideas. And this is back before the DAO hack, right? So, this is probably in early 2016. And then, you know, it just kind of kept going and kept going. And then, you know, I had reached out to a few other people that I had been introduced to through that sort of chain of events, and before you know it, we had 35 sponsors and about 1,500 people at the first ETHDenver. I mean, there was just a groundswell of interest and enthusiasm and curiosity for what this technology might actually be able to do on the quest of improving humanity. It’s really at the core of what Ethereum is trying to do, it's to create better game design through smart contracts and organizational structures and incentives that actually create different outcomes than we’re used to in the traditional dog-eat-dog world. At least that’s the kind of brand promise of Ethereum. And so, it just kind of happened.
And now you ask, like, why did I start it? Well, we started it looking for devs, and then what it really turned into was the world’s largest live-action Web3 experiment. So, we were the second. My day job, Opolis, is the first. We were the first blockchain-based cooperative at Opolis. The second was ETHDenver. We did them concurrently, like one after another, where we basically spun them out to an LCA framework. We invented the concept of a patronage token, which is a unit of account that the co-op uses to determine patronage distributions, if and when those are declared by the board, which is a stewardship board, not a board of directors. But we call it a board of stewards who are really just people from the community representing others from the community and helping make governance decisions and whatnot so there’s not 5,000 voices at the table trying to argue about what you should do, but we try to keep things pretty clean.
And what that means to be the world’s largest live-action Web3 experiment is, you know, we are always looking for ways to improve the template. Now, what am I talking about with that? So, what I’ve found in my life, my career and startups and businesses, is that people often best learn by doing and experiencing things and by watching and seeing how things can be different. So, instead of just having a conference that sits and talks at people and a bunch of smart academic-types get up and cast vision about the future and self-proclaimed thought leaders or whatever, smelling their own farts, excuse my description, but I find it to be a lot of talk and not a lot of walk. So, we are much more about the walk. We’re about building things so that the hackathon at its core is the main event. And we do that primarily because there is a culture of building in the Ethereum community that like, you know, the way that we’ve seen the most innovation is actually the framework that etymologists would call emergent order. It’s sort of bottom up, right? It’s a groundswell of creativity and you give that creativity a place in the space to express itself around other creative people, you get these creative explosions and these creative collisions that happen. And then, boom, really interesting things happen.
We’ve had some of the most formative projects at or incubated and started at ETHDenver. And these are multibillion-dollar protocols or various projects that have gained international recognition for their work, and they either were hatched or incubated at ETHDenver. It’s quite a story.
And then experientially, you know, we’re free to attend, and there’s a reason for that. It’s actually not because we don’t like making money or something, but it’s because socially, it’s very unlikely that a new or curious person is going to come to ETHDenver if there’s a thousand-dollar or even a hundred-dollar ticket. We actually give away as many tickets as we possibly can. We’ve had as high as almost 50,000 applications in a year, and we try to give as many tickets away as we can possibly get the fire marshal to allow us to have. And that’s because we don’t want to create any economic barriers to people learning about this new technology and what that might actually do downstream in terms of their social and commercial experiences.Jerry: So, John, you got us up to 2017. John: Yeah. Jerry: What was the total attendance at the last meeting? John: Yeah, about 25,000 people. Jerry: 25,000. Yeah. John: Yeah. Jerry: Amazing, isn’t it? John: It’s a big production now. So, I mean, our brand presence is global. Everybody knows ETHDenver in the crypto community. And it doesn’t matter if you’re an Ethereum person or not, you know about ETHDenver. Everybody knows about it. Even people who don’t know about crypto that much have heard about it. Our economic footprint over eight seasons is over $250 million of economic impact to the city of Denver and the state of Colorado now. So, it’s on the governor’s radar. I mean, I’ve had many conversations with him. He’s been to ETHDenver for the last six seasons. We’ve had state and national regulators as well as legislators and politicians. You know, I had two sitting governors read a book called “B is for Bufficorn” with Vitalik Buterin and a Bufficorn on main stage live stream to 10,000 people at one point.
So, we’ve become quite a, sort of, social curiosity. If you’re curious about what is this crypto stuff, this is where people go. And then you can actually get involved. It’s not just a consuming information-type of conference-y thing. It’s a participatory thing, right? People come, they create, they build. We have a maker space; we have an art gallery; we have other tech experiments; we have multiple stages varying in complexity from, you know, Blockchain 101 content all the way up to the most sophisticated smart contracts you’ve seen on the planet. And anything in between from tokenomics, governance, DAOs, DeFi, doesn’t matter. You’ll find it. So, there’s something for everyone and it’s completely designed like a choose-your-own-adventure. So, you show up for free, meet as many people in whatever venue and whatever context that you want with a big tent and a blank canvas, come and build, create, express yourself in a way that’s meaningful for you, and then let’s see what we can build together toward the decentralized future. That’s what we do.Jerry: Well, it’s a remarkable phenomenon, no doubt about it. You know, listen, James and John, I recently joined you at a meeting at the SEC Crypto Task Force where the subject was the use of limited cooperative structure to facilitate the DAO corporate governance model. And, James, could you share with our listeners the purpose of the meeting and what it could lead to? James: Yeah, of course. The purpose of the meeting was to get more regulatory clarity or to petition for greater regulatory clarity around the cooperative governance structure as it applies to DAOs. So as we said at the very beginning of our conversation today, since the inception of decentralized autonomous organizations way back in 2016, there has been some tension and some misunderstanding and some difficulty understanding how DAOs are supposed to be governed under U.S. federal securities laws.
So, as I mentioned, a DAO is a community of token holders, and the Securities and Exchange Commission has taken sometimes a kind of opaque view of whether a token constitutes a security for purposes of our federal securities laws. And they’ve taken kind of an opaque view about whether a membership in a DAO constitutes a security. And because of that opacity, it’s been difficult to really scale DAOs. It’s been difficult to get a lot of people involved because we don’t know, if I become a member of a DAO, am I going to be held liable for the actions of the DAO? Is my membership going to be revoked because my token that I hold as a member of the DAO is going to be considered to be a security?
And, in particular, over the last four years prior to the Trump administration, the Securities and Exchange Commission took a very hard line against tokens and against DAO memberships. And it was difficult to really read the tea leaves about where the SEC was going. And under the new Trump administration, there has been a significant shift in the weather. The SEC is very open now to learning more about cryptocurrency and DAOs. They’re interested in creating regulations that would provide some regulatory clarity for the crypto community. And so, when the doors opened, a group of us, including myself, and including John Paller, and including folks from Project Liberty, which is one of the current bidders for TikTok, and Zach Guzman, who’s the founder of Trustless Media. We got together and we thought to ourselves, we really need to be petitioning for rules that can help us run and operate a DAO like we would operate a cooperative. And part of the reason that the cooperative structure was attractive is because there is long-standing regulatory history in the United States for cooperatives.
So, the U.S. Supreme Court in a number of cases has held that a cooperative membership that is non-transferable is not considered a security under U.S. securities laws. The SEC has issued dozens, literally dozens of no action letters holding or rather suggesting that non-transferable cooperative memberships are not to be considered securities subject to U.S. regulation. So, we thought because there’s this solid foundation of regulatory precedent for cooperatives, we could take that solid foundation and apply it to these digital communities, to these DAOs, and thereby have some regulatory clarity so that we can really scale the DAOs up.
So, we went to the Securities and Exchange Commission a couple of Mondays ago. We sat down with members of the SEC Crypto Task Force, and we proposed a safe harbor that would consolidate and codify the Supreme Court and SEC precedents and make it very clear that certain types of DAO memberships that are patterned after cooperative memberships are not considered or would not be considered securities.
So, we proposed three main conditions that a DAO membership would need to meet in order to not be considered a security. The first condition is that the DAO membership would not be transferable, or it would be semi-transferable. So, for example, if I’m a member of a DAO, I might be able to transfer my membership to another member, but I wouldn’t be able to go on to Coinbase or Uniswap and trade my membership with just anybody. So that was the first condition we proposed.
The second condition we proposed is, if you’re a member of a DAO, you can only receive dividends that derive from your own efforts. And that’s another one of those bedrock principles of what divides a cooperative membership from an ordinary share or security. So, that was the second condition.
The third condition is that as a DAO member or to become a DAO member, you would have to be a verified patron, a verified customer, or potentially a supplier of the business of the DAO.
So again, those are the three conditions we’ve proposed to the SEC. The memberships need to be non-transferable or semi-transferable, the dividends need to come from your own efforts, and you need to be a verified participant in the business of the DAO. And if a DAO membership meets those three criteria, then the registration rules promulgated by the SEC would not apply. So, it would provide regulatory clarity. It would provide a solid basis to start scaling DAOs that can operate in the real world, which again, to this point in history, has not been possible on account of regulatory uncertainty. So, yes, that was the purpose of the SEC meeting, and it was very well received, and we have more work to do.Jerry: Well, you know, we do have some examples. We have two, Opolis and ETHDenver, that are operating under this model without the benefit of clergy, as they say. But, you know, John, would you talk about this DAO limited cooperative, if we could operate them on a national basis, what it would mean? And on a practical level, the benefit of this model that Opolis has found for its constituency? John: Yeah, so I think that the most important innovation that’s happened amongst everything that’s going on right now in Web3 tech is the community token. It’s the most important innovation maybe in the history of commerce since the corporation probably was invented and cap tables were well-documented.
And the reason I say that is because up until now, there’s so many barriers to entry for people to participate in the upside of commercial activities. You have to be an accredited investor. You have to have registered securities. Most people are purely consumers. They spend money that they don’t have a way to really participate in game design. And when I say game design, every commercial interaction that we have is a game design. But most of the game designs they participate in are extractive of their dollars and it lines the pockets of someone else. This is the reason why people complain about capitalism being predatory, right? Because the rich get richer, and the poor get poorer, and the middle class get eliminated in certain centers of the game. And it’s just, nobody likes it. And it’s like, then we overcorrect, and we do bad things. And the history of the world is sort of riddled with this scenario.
Well, the community token actually allows for what I refer to as stakeholder capitalism. So, it’s not about the communism or socialism. It’s not left or right. It’s up. It’s actually shifting the game from a scarcity-based game where we compete over the perception of scarce resources, including money, and we actually get to a place where incentives and game design around services, businesses, events, even like ETHDenver, platforms like Opolis, which provides benefits and employment services to independent workers, they actually get to participate as owners. And it changes the unit economics. It changes the attention. It changes the retention. It changes everything. So, when I look at the churn, for example, that we’ve had in Opolis, the percentage of people who leave who are dissatisfied with the services is almost zero. People who leave, leave because they have a hard time sustaining their pipeline of work is really the big one.
You know, when they go out on their own and they’re working as a freelance this or that, it’s very hard to be both good at your craft and also a good marketer in getting good business, right? You know, the gig economy is sort of evolving into the ownership economy, but that’s a whole different game. The point being is the retention is super high. Now, why is the retention super high? Why do people talk about … Well, it’s not different than why people talk about REI or Costco or some of these membership models where they actually get to feel like they’re a party to a bigger thing, right? They’re like on the inside of a club. They’re owners. And so, you know, co-ops have existed for a long time, but they’ve mostly existed geographically, kind of in a somewhat small, they’ve never really been sort of a network state kind of concept. But now that we’ve got these digital communities popping up and you’ve got really interesting economic games that are being presented, including the things that I’m working on, but not limited to. You know, pretty much the sky’s the limit.
So, Jerry, when you and I were walking out of the SEC, and I was sort of explaining this to you, and I kind of saw the light bulb go on, and you’re like, “Well, what you’re basically saying is this could literally be the biggest economic driver that might even be possible. It’s like really shifting the social fabric to this model gives so many more people inclusion in the financial system and better games, less exploitive, less extractive, but not operating from scarcity, but operating from abundance.” And I’m like, “Yep, that’s it. You got it.”Jerry: It has remarkable potential. John: Unbelievable potential. Now, I’m obviously ... my babies are cute, right? Like, so I, I highly believe in what I’m doing, not even opportunistically. Like I have walked through the valley of the shadow of death trying to see this stuff through. So, this is not about fashionability or, “Oh, I’m the cool kid on the block.” Like, for the first seven years of doing all of this stuff, nobody gave a shit about what I was doing. So, I do it only because I believe in a better humanity, and we need better games. We need better economic games. We need better incentives. We need better outcomes. We need better all of that. And you can’t mandate it. You can’t force it. That’s authoritarianism. You can’t get compliance at the core of cracking down on people. That’s how things go off the rails. In historical chapters, you know, this idealistic outcome should happen, so we’re going to force people to do it. And then things end up really bad. But if you create better incentives that both align the needs of the selfish individual with that of the collective, that’s actually never been done in an economic model.
The tension between capital and labor, as a good example, you’ve never really been able to align those. You just have advocates for both sides and the pendulum swings. It’s the tyranny of the minor and majority, depending on which day of the week you’re on. But this way, the community token is actually going to reengineer that. That’s my prediction. And co ops are absolutely critical to this. And having the regulatory clarity so that we’re not, well, is it a general partnership? Is it this? What’s the liability? Co-ops are pretty clear. I had my fair share in dose of cooperative statutes over the past seven years, and I’ve read through all of it, and we’ve scrutinized all of it, and we wrote white papers on it, you know? So, like, we think we know it pretty well, and I can’t in the 17 or so different legal frameworks that we evaluated in thinking about game design incentives, economic incentives, durability, sustainability, and being anti-fragile around governance attacks or whatever. It’s the only legal framework that even remotely comes close to working for DAOs in a digital landscape in a network state. The only one.Sasha: I think that’s fascinating. I want to take you back to a point you said earlier about how, you know, there is no limit here. Jerry’s and my practice is financial services. So we kind of come back to that just by nature of habit. Putting this in a financial services context, we know there are some Web3 applications such as Aave that have a platform offering lending and borrowing services. But how do these work? Is there an intermediary there? And how do you all think about licensing and how that works for companies that are offering these services? John: That’s a great question. And what I’m hearing you say is, how does this apply to things that are already on chain? And how is it all going to work? Sasha: Exactly. John: Well, I think, practically speaking, the early phase of DAO-dom, there’s a lot of belief, and, you know, Aave is a foreign entity, so it’s not even U.S. based. So, just as an example, a lot of them believe that the best structure is like a foundation paired with an ethereal DAO. Now, what I mean by an ethereal DAO is it just strictly exists on chain. Now, the problem with that is, let’s say there were a big hack or something on Aave and there’s a bunch of people in the U.S. that were hurt by that hack. And, well, who are they going to come beef with? Well, can they come beef with the foundation? Are they going to come beef with the DAO that doesn’t even have a legal jurisdiction? Like, how is the entity going to get treated? You know, it doesn’t have a legal wrapper of any sort of formal sort. So, like, is it going to just default to a general partnership? And, I mean, the layer of issues just gets really deep, really fast. And so, a lot of people, Project Liberty, for example, they’ve run into these legal questions, and they’ve just said, no, we’re not going to do it.
Now, in Aave’s case, they just decided to YOLO and go on chain. Okay, we’re just going to go do that. Now, they may or may not have a development shop that has a centralized entity contributing to the protocol, but they’re called contributors, not owners. There’s a lot of ways that people architect these things to essentially, quote, “get around it,” usually going offshore, if not always going offshore.
So, this brings up a really important point that a lot of the DAO-based innovation has gone offshore or uses the foundation in the Caymans or in Malta or wherever as the launching point. And I know people who are doing this in Asia, the Middle East, the Caribbean, Europe, and various jurisdictions just because they don’t want to deal with U.S. regulators. Now, does that preclude them from targeting U.S. customers? Generally, yes. So, they basically have to say, well, we’re going to forego the U.S. market for an international audience that is less sort of regulatory-heavy and uncertain about what we can and can’t do. It’s a little bit more friendly to the YOLO.
And that’s just a really bad idea. I think even the legal frameworks that have popped up out of Wyoming, the unincorporated not-for-profit and the DAO LLC, like, these are all designed as means to try to get around stuff. And they’re kind of cute legal architectures that they definitely work, but the game design, the incentives for participants is actually pretty bad.
Compliance is okay. It works. It’s compliant. Will it meet the litmus test? Generally, probably yes. But like functionally, though, they don’t really have the coordination components and the governance components and the kind of like cooperative efforts that DAOs embody baked into them. So there are ways to get around regulatory uncertainty, but they’re not actually going to solve, in my opinion — and this is not to dismiss any of the hard work that the people who have created these things have put into them — I just have opinions about, you know, if you’re going to create emerging order in communities and societies that are organized around various commercial activities, services, businesses, ownership, whatever it might be, you’ve got to have a very clear template that has good incentive structure, paired with good economic engine and distribution, paired with good compliance chops. And if you don’t have any of that stuff, it’s not going to work.
So, the V1 of crypto, most people, I mean, I even saw people who are calling themselves DAO having C-Corps involved in stuff. And I’m like, what? I was told — and I won’t even name the project — I was told at one point that the C-Corp owned the DAO. I was told in a different context that the DAO owned the C Corp. And I’m like, well, how does that work? If the DAO is ethereal and it doesn’t have a wrapper, how could it possibly be the owner of the C-Corp?
You’ve got a cap table of people or other organizations that are on the cap table. Somebody owns that, and it’s not the DAO. I don’t know how you would paper that because it’s not a thing. And then how does the DAO take a position on a cap table if it doesn’t have a legal wrapper or vice versa? It’s nonsense. And so, this is the result of the disclarity, that murkiness that’s been swirling around really since, you know, for almost 10 years, since the first DAO hack.
Now, “How will it work?” maybe is a good follow-up question. I think what we’ve done is we’ve used a legal wrapper to legitimize a cooperative effort that is not largely on the efforts of others, right? So, you have to be a participating member is what we call it. In each member’s capacity, you have to attend. You have to attend in order to be a member. And your attendance can also take various shapes. You can be a sponsor, a speaker, a steward, a contributor, a supplier. I mean, there’s a whole bunch of stakeholders that participate in the execution of that event. And those stakeholders are rewarded at various different levels based on how valuable the DAO has seen.
For example, a builder who submits a project is rewarded at the highest level of rewards because that’s what we value the most is the innovation. The expression of creativity is rewarded at the highest level where a general attendee who just shows up and eats my food gets the least amount. But then there’s incentives to do other things, like speak, volunteer, or judge, or whatever. It doesn’t matter. There’s a whole bunch of things that you can get involved in, but it’s your contribution of time and talents that brings you the reward. Now, our argument is like, well, why should any of this be a security? Like, everyone’s here because they’re curious about blockchain, they’re participating in this futuristic festival, and this hackathon, and all these various experiential adventures. And why would we have to comply with securities laws? It’s ridiculous.
But under the current framework, you know, there’s a good argument that you should if you’re going to issue a thing like a patronage token or something like that. But we’ve decided to kind of practice the way we think things should operate. And, you know, we’ve fortunately gotten the good blessing and graces of the Colorado Securities Commissioner here to review and look at the things that we’re doing. And she’s offered a personal opinion, and her office has not given us a no action letter, but they looked at what we’re doing. And the governor here is very pro-innovation on blockchain technology, thank God. So, like, you know, they love what we’re doing. They love it.
But on a national scale, my God, you know, if we actually had the green light and clearance, because the challenge is every state is different, right? So, if I’m in Colorado launching an LCA, and then I’ve got California who I’ve got to go register with and they don’t want to play ball with the cooperative framework that exists in Colorado. In theory, they could have a competing law on the books there that would treat their constituents in California differently. And then I might be in violation of that code, right? Just operating a co op. You know, just doing the things that we’re doing.
So, this federal sort of green pasture, this, whatever you want to call it — you know, safe harbor, we’ve called it — you can call it whatever you want. The safe harbor would allow for this innovation to express itself with this sort of overlay effect nationally that states would be disincentivized from getting in the way of that.Jerry: You couldn’t have said it better, John, really. That’s the goal, and we’re moving in that direction, and I think we have at least a sympathetic ear at the federal level. Let’s hope that we can move it even further. You know, this discussion has been fascinating, but, unfortunately, we have run out of time. Really, the potential to transform the way business is conducted in many areas, including financial services, is really interesting to contemplate. John: It is probably the most — it’s the calm before the storm, in my opinion. Yes, we’ve had a decade of crypto games and experiments and weird stuff and memes and meme coins and noise. There’s lots of noise. But I really do think that the work that both your guys’ firm, my companies, and the coalition that we’ve put together has been doing and trailblazing over the past almost decade, I think is going to start becoming the main narrative.
And how does this technology actually apply to the real world? Not just creating a new fantasy land and managing internet money and all that, but how do we actually take these technology tools — because that’s really what blockchain technology is and what crypto is. It’s a tool set. It’s not, you know, number go up, meme coins, you know, blah, blah, blah. It’s not really about that. That is the large narrative that’s captured the mainstream. And that’s why a lot of people are skeptical about it because it seems like just a giant Ponzi scheme, which lots of things are actually.
So, it’s hard to see the forest through the trees there. But my prediction is that you’re going to start seeing a bleed over into the real world in meaningful ways that will, once the genie’s out of the bottle, you’re not going to be able to stop it. It brings a whole new level of transparency, efficiency, high frequency, speed, which is going to drive down costs. It’s going to increase yields. It’s going to make a bigger pie by a lot. And so, we’re going to move into this age of abundance. I guess as the Trump administration would say, it’s the golden age of crypto. I genuinely believe that that’s going to be unlocked by, in part, by this recognition of on-chain communities having an unfettered sort of ability to kind of innovate and experiment in meaningful ways.Jerry: Well, on that note, thank you again. And, you know, there’s so much more as this becomes more concrete and as things advance at the federal level, we’re going to want to have James and you back for another discussion. James, thank you so much for helping to organize this. And we very much appreciate it. I know Sasha feels the same. Sasha: Thank you both. James: It’s been a pleasure. Thank you. John: Man, my pleasure. Thanks, guys.