Cayman Islands DAO Wrapper: Exclusive Interview With David Lloyd, Bell Rock Group Founder

One of the biggest challenges Decentralised Autonomous Organisations (DAOs) contend with is finding a suitable legal wrapper. In most cases, this is due to a DAO inherently lacking the legal capacity to execute “off-chain” contracts.

However, one of the earliest attempts to give DAOs a form of legal recognition is the 2017 Cayman Islands Foundation Companies Law. In the Cayman Islands, DAOs operate tax-free as foundation companies with the legal personality and limited liability of a typical company.

I recently sat down with David Lloyd, the founder and Managing Director of Bell Rock Group, a Cayman Islands regulated company manager that not only helps DAOs to form Cayman foundation companies but also acts as their directors, supervisors, registered office, and secretary. Enjoy the conversation!

David, can you recount your journey to blockchain and the crypto world?

We worked with many of the first blockchain projects to provide services in Cayman to their DAOs. As a regulated and licensed firm with the Cayman Islands Monetary Authority, we have always been well positioned to incorporate Cayman foundations, provide experienced directors to the board of the foundation, secretary services, the supervisor and many other support services to help the growth of the DAO community.

We have also worked to assist fund managers with the launch of digital asset hedge funds and provide independent director services and governance to such funds throughout the fund lifecycle. We also routinely work on requirements to register as a virtual asset service provider (VASP) so intricately involved with developments in the blockchain space.

Our firm has traditionally worked with asset managers, blue chip companies, investment banks, and high-net-worth individuals, providing independent governance services. Each of our directors has over 25 years of senior-level industry experience but also developed niche expertise throughout the growth in DAOs, blockchain protocols, web3 developments and crypto services.

DAOs face many challenges. One of them is finding a legal wrapper. What is your experience dealing with it?

A Cayman Foundation differs from an ordinary company primarily because it does not need to have members. The Cayman Companies Act governs a Cayman Foundation—unless it is excluded, modified, or inconsistent with the Cayman Foundation Companies Act. The fundamental corporate structure of a Cayman Foundation is tried and tested, and legal jurisprudence regarding Cayman companies also applies to it.

These are the typical roles in a Cayman Foundation, all of which we provide at Bell Rock: Founder, Director, Shareholders/Members, Beneficiaries, Supervisors, and Secretary. The founder is usually the person who established the structure through a contribution of assets. The Foundation Act does not formally define the role of “Founder,” so the governing documents may specify what (if any) powers the Founder retains.

For example, the Founder may reserve the power to appoint the directors or amend the governing documents, but the Founder may also have no ongoing role in the foundation. Since DAOs utilize a bottom-up governance structure, the Founder would not normally retain any powers in the Foundation.

As with an ordinary company, a Cayman Foundation is managed by a board of directors, with the same powers as in an ordinary Cayman company, though they may be restricted to align with the DAO’s specific objectives. Regarding Members/shareholders (if there are any), a Cayman Foundation must initially be incorporated with one or more members (the same as an ordinary company), but it can cease to have members at any time, without affecting the foundation’s existence, capacity, or powers. A Cayman DAO may therefore exist as an orphan entity without any members or shareholders. An ownerless Cayman Foundation DAO jibes nicely with the ethos of the hierarchy-less DAO and its community.

Cayman Foundations may choose to have beneficiaries. Unless otherwise specified, the beneficiaries will not have any powers, rights, or standing to sue the foundation (such a supervisory function is vested in a “supervisor”). Beneficiaries may be specified people or a class of people—for example, token-holders or certain community members, whom the Cayman Foundation DAO may be structured to reward. As beneficiaries of the Cayman Foundation DAO, token-holders would not have any personal liability for the foundation’s debts or financial losses.

As for supervisor(s), if a Cayman Foundation ceases to have members, it must have one or more “supervisors” (who may also be directors). As suggested by their title, supervisors enforce the rules of the Cayman Foundation and typically have the right to access its files, books, and accounts. A supervisor has no ownership or economic entitlement in a Cayman Foundation. And lastly, the role of Secretary can only be provided by a licensed company manager, such as Bell Rock.

How is Bell Rock Group solving this problem?

We have worked with many different protocols, the founders and their legal counsel to incorporate Cayman foundation companies to create a limited liability entity to enable the DAO to operate, provided protection to DAO members and allow for the DAO to operate, open accounts, hire developers, manage treasury and generally operate the DAO. We provide a one-stop solution for DAOs in the Cayman Islands and as a regulated provider of services in the Cayman, we are well-positioned for future regulatory developments in this sector.

What are the major criticisms levelled against the Foundation Law and how do you respond to them?

The major criticism is the lack of decentralization with any formal legal governance structure. The core premise of DAO decentralization is undermined by the structure of a foundation company as the foundation is set up to have a legal personality and is treated like a typical company (i.e., able to enter into contracts, undertake actions with third parties, etc.

Even with the issuance of voting tokens and a governance framework, many governance protocols claim to be fully decentralized yet fail to achieve the level of decentralization necessary to continue operating without interference. Even with the issuance of voting tokens, it is often the case that tokens are concentrated with certain holders who can then exercise control on decisions. There is no perfect solution all round but the Cayman foundation has been seen as outweighing many of the cons given its flexibility.

Moreover, as we have seen recently with the Arbitrium governance tokens, many DAO members were disgruntled by the founders not putting certain matters to a vote, especially when it concerns treasury. What we witnessed was a backlash against the DAO foundation.

Many DAO evangelists yearn for a balance between DAO legislation and innovation. How can this be realised?

The governing rules, structure, and roles of a Cayman Foundation can be adapted to suit a range of bespoke needs. And, because the constitution of a Cayman Foundation can be supplemented with bylaws that are not filed with the Register of Companies, they are private, affording the Cayman Foundation some privacy and the flexibility to set its own rules about structure and management.

The bylaws may relate to any aspect of the Cayman Foundation or to any of the duties or powers of the directors or other officeholders, including how to achieve the foundation’s objectives. For DAOs, the substantive rules about how community members will govern the DAO typically live in the bylaws, which may also restrict the directors’ powers in keeping with the DAO’s democratic governance model.

Anti-crypto US Senator Elizabeth Warren is proposing a ban on owning a personal crypto wallet. What are the implications for the growth of DAO in the US?

The current bill does not distinguish between blockchain protocols and exchange-traded cryptocurrencies. DAOs will continue to develop at a rapid pace. If personal crypto wallets are banned, it would severely limit the ability of individuals and organizations to participate in the creation and operation of DAOs. Furthermore, the ban would hinder innovation in the crypto industry, which has been a driving force for the development of new technologies and financial products.

If the ban were to go into effect, it could also lead to a shift in the global crypto market, as investors and developers may move their operations to other countries where personal crypto wallets are allowed. It's worth noting that Senator Warren's proposal is just one of many ideas being discussed in the US regarding crypto regulation, and it's not clear if it will become law. Nonetheless, it highlights the ongoing debate over how to regulate the crypto industry and the potential consequences of such regulations.

Are DAOs here to stay?

Absolutely, although they will naturally evolve in terms of their operations and I believe many jurisdictions are already starting to look at regulating DAOs and/or the service providers that provide services to them. However, the regulation of DAOs is not a bad thing. I see nothing wrong with regulated service providers being the firms best placed to hold DAOs accountable to a high standard in terms of compliance and sanctions screening, prudential governance, cybersecurity, business contingency, internal controls, market conduct, accounting standards and so on, which is an expectation of those very service providers.

Despite some regulatory and technical challenges, the potential benefits of DAOs are significant, and we can expect to see more experimentation and adoption of DAOs in the future.

How can DAOs be truly decentralised?

The control of the DAO should be distributed among its members, without any individual or group having undue influence over the decision-making process. This can be achieved through the use of transparent and auditable smart contracts that automatically execute decisions based on pre-defined rules and conditions.

What, in your view, is the most significant milestone for DAOs?

The most significant milestone for DAOs was the launch of the DAO, also known as DAO1, in April 2016. The DAO was a decentralized autonomous organization that aimed to create a decentralized venture capital fund, where members could invest in startups using digital tokens.

The DAO raised over $150 million in Ethereum in just over a month, making it the largest crowdfunding campaign in history at the time.

However, it also suffered a major security breach in June 2016, which resulted in the loss of over $50 million worth of Ethereum. The incident led to a contentious hard fork of the Ethereum blockchain, which ultimately led to the creation of Ethereum (ETH) and Ethereum Classic (ETC) as separate blockchain networks.

While the DAO ultimately failed as a result of the security breach, it served as a significant milestone in the development of DAOs. It demonstrated the potential for decentralized crowdfunding and investment and highlighted the importance of security and governance in the design of DAOs. It also led to significant advancements in smart contract development, which have since been used to create a wide range of innovative DAOs in areas such as decentralized finance (DeFi), governance, and social networks.

Any parting words?

The future of blockchain and decentralization is exciting and we, at Bell Rock in the Cayman Islands, are excited to be a part of future developments in how DAOs govern themselves, virtual assets and web3 communities. To the extent that we can support the growth of DAO communities then we will play a fundamental part.