Understanding DAOs and Legal Wrappers in Switzerland

A legal wrapper is crucial for giving a decentralized autonomous organization a recognized legal status. This legal framework is important for several reasons. The most obvious is that a legal wrapper often offers a limited liability protection. This way it shields members from personal responsibility for the DAO’s actions (within some limits, for example when the DAO is purposefully used by its members to commit crimes or fraudulent actions).

The key idea of a DAO wrapper is best summarized as follows: 

• A legal wrapper is a legal entity that a DAO uses to operate within existing legal systems, providing it with separate legal status, limited liability, and tax optimization.
• A well-designed wrapper essentially provides a legal framework for a DAO to interact with traditional financial and legal systems while maintaining their decentralized nature.

Without a legal wrapper, DAOs operations might be challenging from both legal and purely logistical reasons. A legal wrapper separates the operations from the individuals involved, protecting them from personal financial or legal risks. To the contrary, unregistered DAOs will face difficulties in establishing relationships with investors, cryptocurrency exchanges, contractors, and other business and legal entities (for example: major crypto exchanges will very often require DAO to have a commercial registry entry – you can’t have one without having a legal wrapper).

• Having a legal wrapper allows to connect with traditional financial systems, sign contracts, own digital assets, be token holders and work with banks and cryptocurrency exchanges. 

This improves the DAO’s ability to operate and builds trust with regulators, investors, and other important parties. In Switzerland, legal wrappers ensure that organizations meet all local legal requirements. Those consist of tax laws and anti-money laundering (AML) rules.

Switzerland offers two primary legal structures for DAOs: the Swiss Association and the Swiss Foundation. Each structure has its own benefits and disadvantages, making them fit for different types of DAOs depending on their needs.

1. Swiss Association

Pros:

• Cost effective: A Swiss Association is a flexible and cost-effective legal structure. Requiring only two members makes it easy to form. Associations don’t require any capital to start.
• No mandatory immediate registration with the commercial registry: To become existent, Swiss Association does not have to be registered with the commercial registry. Only once it reaches certain level of financial activity, it will have to apply for a commercial registry entry (which can be beneficial since the counterparties and the ecosystem nods will often require a commercial registry anyways). This makes it an attractive option for smaller DAOs or those focused on governance tokens and community-driven projects.
• Flexible: The Swiss Association also allows for global operations, with members who can be both legal entities and individuals. This flexibility is beneficial for DAOs consisting of a dispersed group of ecosystem participants across various jurisdictions.
• Additionally, there’s no requirement to have a local bank account, allowing for a faster setup.

Cons:

However, the Swiss Association does have limitations.

• No anonymity: It mandates a level of transparency that may not align with DAOs prioritizing anonymity. For instance, associations must maintain a membership list, accessible to those with a legitimate interest. This could be a drawback for DAOs wishing to keep their membership confidential.
• Less protection: The association structure lacks the formal governance mechanisms and asset protection. 

2. Swiss Foundation

The Swiss Foundation provides a more structured and complex legal framework. This is especially suitable for larger DAOs and web3 projects that concern substantial assets. Swiss foundations are known for their legal clarity, international credibility, and robust asset protection.

Pros:

• Legal personality:

Swiss Foundation has its own legal personality, allowing it to enter contracts, own assets and interact seamlessly with traditional financial and legal systems.

• Credibility:

A key benefit of using a Swiss Foundation as a DAO legal wrapper is the credibility it brings. Swiss foundation is a regulated entity and is subject to certain audit and governance supervision. This reputation gives significant trust and legitimacy to DAOs that use Swiss foundations for their legal wrappers. This is crucial in the blockchain and web3 space, where trust and credibility are paramount.

• Stability:

Swiss foundation must have an experienced board and often includes a reputable management team. Many DAOs prioritize stability, compliance, and asset protection, so they choose the Swiss Foundation despite its more complex legal structure.

• Liability:

Its structure ensures that assets are held separately and (subject to some limitations) are not dependent on personal acts and liability of its board members, providing a strong defense against external claims. This is critical for DAOs involved in large-scale DeFi projects or venture capital funds.

Cons:

• Resources and capital: However, setting up a foundation is more resource-intensive compared to forming an association. You must contribute a minimum capital of CHF 50,000 in cash, property, or other assets. The setup process is longer since it requires an authorization from the supervisory authority.

Switzerland’s clear regulatory framework is another reason which makes it attractive for DAOs. The Swiss Financial Market Supervisory Authority (FINMA) provides guidelines on regulating crypto and blockchain activities, including Initial Coin Offerings (ICOs). DAOs in Switzerland must comply with financial and securities laws, such as the Anti-Money Laundering (AML) Act and the Financial Market Infrastructure Act.

• For DAOs using a foundation structure, additional considerations include economic substance regulations and UBO (Ultimate Beneficial Owner) reporting requirements.
• These ensure the foundation maintains a genuine economic presence in Switzerland and operates transparently. However, the UBO requirement could be challenging for DAOs that value anonymity, as it requires identifying individuals with significant control over the foundation.
• Regulatory bodies across the globe, such as the Securities and Exchange Commission (SEC) are increasingly examining DAOs, irrespectively of their place of registration, especially those issuing tokens that could be considered securities.

This makes it essential for DAOs to have a legal wrapper that not only offers flexibility but also ensures compliance with regulations, particularly for activities that might trigger securities laws.

Switzerland offers strong legal options for DAOs but it’s also important to consider alternatives in other countries. In the United States, the Limited Liability Company (LLC) is a popular legal structure.

1. 1. Choosing the right DAO legal wrapper is a critical step for any decentralized autonomous organization seeking a sustainable and legally compliant operation.
      • Switzerland offers two strong options: associations and foundations, each with its own advantages and trade-offs.
      • A Swiss Association is easier to set up and more flexible, while a Swiss Foundation offers greater stability, legal protection, and international credibility, but at a higher cost and stricter regulations.

      For DAOs aiming to leverage Switzerland’s global credibility while ensuring compliance with complex regulatory frameworks, understanding these legal entities is essential. 

      Consulting with legal experts who specialize in DAO governance and legal structuring can help align the DAO’s goals with the most suitable legal wrapper. This not only safeguards the DAO’s operations but also enhances its credibility and operational effectiveness on a global scale.

      In today’s evolving regulatory landscape, where jurisdictions worldwide are grappling with blockchain technology and decentralized governance, Switzerland remains a top choice for DAOs seeking a stable and favorable legal environment.

      Whether through an association or a foundation, the right legal wrapper can help a DAO thrive, protect its members and assets and mission while navigating the complexities of the global regulatory environment.

      This is especially important for DAOs involved in DeFi projects, venture capital funds, and other activities requiring robust legal protections, voting powers, and compliance with regulations involving digital and fiat currencies.