Cayman Islands Foundation Companies For DAOs, Defi And NFTs – Technology

The rise of cryptocurrencies and digital assets (crypto, for
convenience) has led to the creation of many new and innovative
projects, particularly in decentralised finance (defi),
non-fungible tokens (NFTs) and play to earn gaming (P2E) where
decentralised autonomous organisations (DAOs) have become the model
of choice.

For almost all such projects, it will be necessary to establish
an entity to assist with any formal legal actions which might be
required in connection with the project (particularly as a DAO does
not have legal personality). Of the options and jurisdictions
available, the Cayman Islands (Cayman) foundation
company (foundation) has proven to be a
particularly popular vehicle for use in conjunction with crypto
projects and DAOs.

In this guide, we highlight some of the primary reasons why
Cayman foundations are well suited for DAOs, NFTs and defi their
practical uses and some relevant considerations that may
apply. One of the most important considerations, as explained
further below, is the Cayman Virtual Assets (Service Providers) Act
(VASP Act) and how it might impact a project.

WHY FOUNDATIONS FOR DAOS, DEFI AND CRYPTO

The basics of a Cayman foundation are set out in our
guide here. In brief, a foundation is a hybrid
corporate vehicle unique to Cayman with separate legal personality
and limited liability. It can however function like a trust or
foundation, with the potential to identify beneficiaries to receive
benefits from the foundation over time, and to provide for certain
powers to be held by persons or entities other than the directors
of the foundation. Importantly for decentralised projects, a
foundation can cease to have members (i.e. shareholders) making it
an ownerless vehicle.

In a crypto context, foundations may be an ideal option for a
variety of often complimentary reasons:

• Ownerless – as above, a foundation can cease to
  have shareholders or members, and so fits nicely with the
  decentralised ethos of DAOs and defi (where there is often a desire
  for ownership and control to be decentralised) versus traditional
  entities which typically have shareholders or owners.




• Corporate status – because a foundation has
  separate legal personality, it can execute contracts and token
  agreements and open exchange or bank accounts.




• Flexible control mechanisms – given it is
  possible to build in control mechanisms to be held by persons other
  than the directors, the foundation can be established so that the
  founding or core team members can have a say in the direction of
  the foundation (usually achieved through the establishment, for
  example, of supervisor or advisory committees).




• Speed – foundations can be established quickly in
  a basic form once onboarding and KYC processes are completed (with
  express incorporation possible within 24 hours for a small
  fee).




• Recognised structure – given the widespread use
  of foundations in connection with crypto projects,
  Cayman foundations are familiar to many industry participants
  and in particular venture capital (VC)
  investors.




• Clear regulatory regime  – Cayman (when compared
  with other jurisdictions which might be under consideration) has a
  clear and favourable regulatory framework in place making it an
  attractive option to establish crypto related entities.




• Quality service providers – Cayman has a wide
  range of excellent local service providers familiar with crypto and
  willing to provide registered office services, as well as
  individuals to take on the roles of foundation secretary, directors
  and supervisors.




• Bylaws – where privacy is of concern, it is
  possible to include more specific details of how the foundation is
  to function in practice in separate bylaws which are not filed with
  the constitutional documents.




• Tax advantages  – whilst usually not the primary
  driver, the tax efficiencies offered by Cayman as a jurisdiction,
  such as an absence of corporation, capital gains and income taxes
  are often an added bonus.

HOW ARE FOUNDATIONS USED IN CRYPTO?

On account of their flexible nature, there is almost no limit to
how a foundation might be structured and used in connection with
crypto projects. By way of example, a foundation could:

• Provide a legal ‘wrapper’ (or corporate personality)
  for DAOs and defi projects;




• Act as a service provider for DAOs and defi projects by signing
  documents and engaging developers or consultants on behalf of the
  DAO;




• Act as a fundraising vehicle for early stage and VC private
  funding (something expressly provided for by the VASP Regulations
  as noted below);




• Hold a projects treasury assets to pay for services that are
  needed on an ongoing basis;




• Provide a vehicle for airdrops, which can be an effective way
  to promote decentralisation, and grants to support those interested
  in helping a project;




• Act as a parent or holding entity where subsidiaries carry out
  functional activities for the project are better suited to other
  jurisdictions in the particular circumstances; and




• Provide marketing and development services for NFTs, P2E games
  and metaverse projects.

RELEVANT CONSIDERATIONS

Even though foundations can be established quickly, careful
analysis is still required at the outset as to the regulatory, tax
and practical considerations which might be in play for any given
project. As each project or DAO is different it is not possible to
outline all potential considerations but the list below contains
some common considerations:

• VASP Act – for any project the first
  consideration is the Virtual Assets (Service Providers) Act
  (the VASP Act) which regulates certain crypto
  related activities. See our guide 
  here for further details of the VASP Act and the services
  it covers.




• Other Cayman laws and regulations – outside of
  the VASP Act it is often necessary to consider other financial
  services laws and regulations which may be engaged by the proposed
  activities of the foundation. That will often include the
  Securities Investments Business Act and the Private Funds Act
  together with economic substance and AML and KYC regimes.




• The onshore position  – irrespective of the legal
  position in Cayman such as under the VASP Act, it is critical that
  quality legal, regulatory and tax advice is obtained in early
  course from advisors in jurisdictions with which the founding team
  and project are connected to ensure any obligations are met and to
  avoid any unwanted surprises.




• Local service providers – all Cayman foundations
  must have a registered office and secretary which hold the
  requisite Cayman licences. In addition, it may be necessary to
  engage a local service provider to act as supervisor (if the
  foundation ceases to have members) and independent
  directors. These services usually come with an annual cost
  depending on the nature of the project and the roles required.

As with all structuring of this nature, quality and carefully
considered legal and other advice should be obtained from
professional advisors in this space in early course to avoid any
unwanted surprises.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.