DAOs and Legal Wrappers: Swiss Perspectives

Legal wrappers are crucial for giving a decentralized autonomous organization a recognized legal status. This juridical framework is important for several reasons. The most obvious is that a legal wrapper for your DAO 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 system for a DAO to interact with traditional financial and legal systems while maintaining their decentralized nature.

Without it, their 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 organizations (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 structure).

• 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 its 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 systems 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. These systems are examples of how countries can enable DAOs through thoughtful juridical systems, helping organizations obtain legal structures while addressing issues like personal liability and fiduciary duties.

• Cost-effective. A Swiss Association is a flexible and cost-effective legal organization. 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, a Swiss Association does not have to be registered with the commercial registry. Only once it reaches a certain level of financial activity will it need to apply for a commercial registry entry. This can mitigate barriers for smaller DAOs or those focused on governance tokens and community-driven projects.
• Flexible: The Swiss Association allows for global operations, with members who can be both legal systems and individuals. This flexibility is beneficial for DAOs consisting of a dispersed group of ecosystem participants across various jurisdictions. Furthermore, it does not require a local bank account, enabling faster setup.

However, the Swiss Association has 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 pose challenges for DAOs aiming to keep their membership confidential.
• Less protection. The association structure lacks the formal governance mechanisms and asset protection provided by other structures, such as a company limited by guarantee.

The Swiss Foundation provides a more structured and complex legal framework. This system offers legal recognition, making it especially suitable for larger DAOs and Web3 projects involving substantial virtual assets.

• Legal personality: A 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. The foundation is a regulated entity and is subject to audits and governance supervision. This reputation builds trust and legitimacy for DAOs using Swiss foundations as their articles of association. Trust is critical for blockchain projects and Web3 ecosystems, where clear governance and strong fiduciary duties are paramount.
• Stability: Swiss foundations require an experienced board and often include a reputable management team. Many DAOs prioritize stability, compliance, and asset protection, making the Swiss Foundation an attractive choice despite its more complex structure.
• Liability: Its structure ensures that assets are held separately and are not subject to the personal liability of board members. This provides a strong defense against external claims, especially for DAOs involved in DeFi projects or venture capital funds.

• Resources and capital: Setting up a foundation is resource-intensive compared to forming an association. It requires a minimum contribution of CHF 50,000 in cash, property, or other assets. The setup process is lengthy and requires approval from the supervisory authority.

Choosing the right legal wrapper is a critical step for any decentralized organization seeking a sustainable and legally compliant operation. The legal wrapper essentially provides a legal framework that helps a DAO operate within existing systems and ensures protection for its members and core contributors.

Switzerland offers two strong options for DAOs: associations and foundations, both recognized as distinct legal entities. These forms of legal wrappers each come with their own advantages and trade-offs.

• A Swiss Association is easier to set up and more flexible, requiring only two members of the DAO and no immediate registration unless financial activity reaches a certain threshold. This makes it suitable for smaller DAOs focused on governance or community-driven projects. Additionally, it doesn’t need a local bank account, allowing DAOs to start operations faster.
• Meanwhile, a Swiss Foundation is ideal for larger projects, offering stability, asset protection, and fiduciary duties to the purposes of the organization rather than to the interests of individual members. Foundations are governed by smart contracts when integrated with DAOs and are often selected for their ability to handle substantial assets while ensuring credibility in the legal and regulatory environment. However, they are costlier and more complex to establish.

Both structures reflect the evolving legal landscape for decentralized organizations. For DAOs considering establishing a DAO in Switzerland, these entities provide excellent options to align their dao activities with compliance requirements. While associations are cost-effective, foundations offer a legal framework for a DAO that meets the needs of projects requiring international trust and stability.

For some DAOs, these Swiss structures are not the best fit. For example, U.S.-based DAO LLCs like the Wyoming model combine features of corporations and trusts, offering limited liability and smart contract-based governance. Similarly, jurisdictions like the Cayman Islands provide foundations that enable DAOs to function as entities that a DAO employs to operate within existing legal systems. These foundations are also well-suited to protect the liability of DAOs, particularly in complex regulatory environments.

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 system, with the Wyoming DAO LLC standing out as a notable option.

The Wyoming DAO LLC integrates smart contracts into its legal framework, allowing for more automated governance. However, it is more restrictive than a typical LLC and may not provide the same level of legal recognition, asset protection, or international credibility as a Swiss Foundation. These differences highlight how DAOs must carefully evaluate their options when choosing the best structure to mitigate risks and ensure compliance.

Beyond Switzerland and the Cayman Islands, various jurisdictions provide trust vehicles or company limited by guarantee structures for DAOs. While some of these vehicles offer clear advantages, others lack the articles of association clarity or robust asset protection needed for larger DAOs.

DAOs engaged in global projects must weigh options carefully, considering factors like taxation, governance needs, and international recognition. Whether using Swiss options, U.S.-based LLCs, or innovative solutions like the Cayman Foundation, the right choice depends on a DAO’s size, scope, and compliance needs. For DAOs prioritizing stability, transparency, and compliance, structures like the Swiss Foundation remain a gold standard, while newer solutions continue to emerge.

Ultimately, selecting a jurisdiction and legal form is a strategic decision that requires comprehensive legal and financial advice tailored to the DAO’s unique goals and operations.

Each DAO must assess its goals, scale, and governance needs to select the best structure. Consulting with experts in DAO governance of the legal wrapper can help determine which structure aligns with operational priorities while ensuring compliance with local laws. This approach ensures that DAOs not only adhere to certain legal requirements but also build credibility and trust in their ecosystems.

For those who want to wrap your DAO within a clear and compliant legal structure, options in Switzerland, the U.S., and the Cayman Islands remain some of the primary choices. Each framework reflects different forms and jurisdictions, so securing legal advice is essential before proceeding.

By understanding the traditional legal systems available and how they can be integrated with the DAO, organizations can find a solution that meets their needs while ensuring long-term operational stability and trust. DAO communities that take this step proactively position themselves for success in the evolving global market.

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.