Twali Wrapped - Crypto's Green New Deal, How Crypto Affects Both Sides of the War, and NFT Regulation with Ross Campbell, founder of KaliDAO
Twali Wrapped is a community-driven initiative to track the most important developments of the past week for policy, regulation, compliance, and legalities, related to web3.
In addition, we speak with experts toiling with how best to implement regulation and policy changes, while prioritizing simplicity in communication to ensure our reader’s complete understanding of the implication of such developments.
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This Week on Twali Wrapped - March 11th
California and Switzerland proposing to adopt cryptocurrencies as legal tender.
Crypto’s Green New Deal or the “Executive Order on Ensuring Responsible Development of Digital Assets.”
How both Russia and Ukraine benefit from the implementation of cryptocurrency during the war.
An interview with Ross Campbell, founder of KaliDAO, on the regulatory implications of NFTs and DAOs’ legal structures.
Twali in conversation with Chase Chapman, founder of Decentology, on the developer experience and Index Coop.
On the Docket - Proposed Bills and Legislations
This week, we review recent moves in California and Switzerland to adopt cryptocurrencies as legal tender.
Key takeaways:
California is the second state to propose legislation on adopting digital currency as legal tender, following Arizona.
Switzerland becomes the second country in the world (after El Salvador) to accept cryptocurrency as legal tender.
In mid-February, Assembly Bill 2689 was introduced in the California Legislature, proposing adoption of “virtual currency” as a method of payment for any good or service, including any governmental service from private and public entities. The bill is set to be heard in committee as soon as March 21. The implications of California’s proposal are more symbolic than anything else. Because state lawmakers have the final say on what “legal tender” is, this move is largely to motivate discussion of what roles digital currencies will play in the US.
On March 3, the city of Lugano, Switzerland, announced Bitcoin, Tether, and Lugano’s own LVGA stablecoin as de factor legal tender. “Lugano’s Plan B,” a the joint venture between Tether and Lugano, was announced via livestream, outlining how cryptocurrencies will be accepted as legal tender for taxes, public services, a wide array of local permit fees, tuition, access to public spaces, and more—including goods and services from 200+ businesses and shops in the city. This sweeping move comes before the EU’s vote on the Markets in Crypto-assets (MiCA) proposal, a packet of regulations on stablecoins and crypto services at EU level. For now, only time will tell how legal action in Lugano and the EU will shape communities, economies, policies, and innovation, and where countries will stand.
Crypto's Green New Deal: The Executive Order
On Wednesday, the Biden Administration issued a long-awaited executive order which would order federal agencies to build a more crypto-inclusive regulatory framework. The “Executive Order on Ensuring Responsible Development of Digital Assets” is far-reaching — much like the broader digital asset ecosystem — and leaves a lot of question marks.
However, industry experts were generally optimistic on the order. That’s because the order itself was a lot more upbeat than the crypto industry was calculating for.
We can’t help but make a comparison between the Biden Admin’s EO and the Green New Deal (a highly-controversial, unpassed climate proposal put forward by New York Congresswoman Alexandria Ocasio-Cortez). They are not similar in what they aim to accomplish — they are two vastly different bills attacking different problems — however, their goals are the similar in form: they lay out a list of understandings, make a commitment to do something, and then leave it up to construction.
And if there’s one thing we can glean from the unfounded and bizarre controversy around the Green New Deal, it’s that people get really bent out of shape over Nothing Burgers. The same has gone — and continues to go — for the Biden executive order, mostly because it’s vague. It leaves things up to construction by regulatory agents and experts.
That said, here are the takeaways we think were most important from the executive order:
The order directs the Treasury and other agencies to develop policy recommendations which can help nestle digital assets within existing laws (and make new ones where applicable.)
Where there is crypto, there are concerns about fraud and money laundering. The order orders agencies to create “frameworks” which reduce “national security risks” and “illicit finance.”
The report itself doesn’t mention stablecoins (which is interesting because they have been controversial with political-types) but does call for research into creating a Central Bank Digital Currency or Digital Dollar initiative.
These recommendations seem constructive, rather than destructive. That’s evidenced at least by the order’s explicit references to “support[ing] technological advances.”
However, most importantly, the executive order might be a symbolic recognition by the powers that be that speaks to the value of digital assets — which are being rapidly adopted by Americans.
What Side Is Crypto Helping In the Russian-Ukraine Conflict? Both.
Russia and Ukraine wrapped a third round of unsuccessful diplomatic talks this week without coming any closer to common ground. However, in spite of all their differences, there is one thing which Russians and Ukrainians alike can shake hands on — using crypto to escape the economic fallout of their respective countries.
Russians and Ukrainians alike have reportedly fled their respective currencies and markets because of a mix of factors including government-imposed restrictions on currency movement, rapid devaluation of Russian & Ukrainian stocks and bonds, and general geopolitical instability. The exodus from Fiat to crypto in Ukrainian Hryvnia and Russian Ruble-denominated crypto markets has been a meaningful one.
In Russia — where sanctions are taking their toll on the country’s currency, markets, and economy — millions of dollars worth of trades executed in Ruble markets support the case that countrymen are trying to evacuate their money from the country. That comes amidst the backdrop of Russian President Putin’s decision to ban cash exports exceeding $10,000… which is liken to locking everybody inside a burning building.
For Ukraine, which embraced crypto far before the war, the situation has been less dire (but still fairly dire, in the grand scheme of things.) Ukrainian crypto exchange Kuna saw its trading value soar after the country’s central bank suspended electronic cash transfers — and many assets traded at premiums as users tried to swap their country’s native currency for digital assets such as $USDT, $BTC, and $ZEC. Today, its 24 hour volume sat at USD$1.3 million.
However, the plight of working Russians and Ukrainians have not been held equally — mostly because, in the West, Russia is viewed as an aggressor and a warmonger. And any conversation about Russians using crypto to evade aggressive economic sanctions will surely arouse discussion about the Oligarchs, a group of state-sponsored rich folk who are looking to secure their wealth in spite of Western sanctions.
That’s a lot to digest — and while there are no shortage of facts and figures, we can’t possibly have a comprehensive picture of the truth. However, one thing is certain: crypto’s promise as a borderless, global money is turning its neutrality as an asset into a political battleground — on one side of the coin is the promise of a crypto which supports an aggrieved, war-ridden people. However, on the flip side is an asset class supporting an aggressor and warmongering state (and all its many oligarchs.)
Crypto’s very intentional functionality (and all the freedom it offers) is likely about to be antagonized — regardless of any good it might offer to working people — because of the way it might be used to help Russians (working class and oligarchs) evade sanctions. That might make for more regulation, political scrutiny, and social media noise around digital assets…
We’ll report on any developments if (and when) they arise.
The Ross Campbell Interview: KaliDAO's Founder on the regulatory implications of NFTs and DAOs' legal structures.Ross Campbell
This past week, I sat down with Ross Campbell, founder of KaliDAO, Twali Expert, and fellow Seed Club cohort member to discuss how he understands NFTs from a securities perspective, the best legal practices he’s seen DAOs implement thus far, and the phenomena of FWB incorporating as a C Corp.
David: How should we be thinking about NFTs? Are they securities or….?
Ross: One of the cooler aspects of NFT’s has been their use as membership and identity. For example, with Bored Ape Yacht Club, by buying an NFT you’re buying a pass to join that community. Although there can be some NFT’s that might be considered securities, because they offer passive cash flow or royalties, a good trend that I’m seeing is people to participate and access a community, by using an NFT as a membership card, or ticket. In that sense an NFT is an invitation to create value with other people. It is that direction that’s beneficial and unique to the space. It’s almost like anyone can join a company, anyone can join a DAO by buying an NFT and thus the ability to co-create. That’s the better direction for understanding NFTs from a compliance or regulatory perspective. Teams don’t sell NFT’s to fundraise just for themselves. They’re inviting people to join them and to build something together.
To drive it home, I think the most primitive form of NFT’s as a membership card to create value, to work or build with other people. That is distinct from selling an NFT, merely to fundraise or to promise people, you know, a speculative, you know, bet or passive value. So, I would also clarify that anything can be a security. It’s considered an investment contract based off the manner of sale and the expectations purchasers have. NFTs usually have expectations. I’m buying a collectible because other people are buying that collectible and now we can find each other easily on chain, on the internet, and then we’ll take it from there. That’s the benefit of NFTs that have simple launches. They start out simple and have this use case, this potential of holding data, whatever that may be, that distinguishes it from other assets.
David: How do NFT crowdfunds work? What’s the legality like here and how does it relate to entity equity?
Ross: When you sell goods, commodities, art, people get what they pay for. They’re not making a speculative bet on something that somebody is going to produce in the future. Securities laws care about what they call information asymmetries: insiders having more information about whether something is going to succeed or not versus the average consumer.
An NFT is an immediate product that you receive once bought. People that want to launch an NFT sale, I would recommend, shouldn’t use the language of crowdfund or crowd sale per se, because that does evoke registered offerings. Instead, they should say they’re doing a distribution or sale because that’s what they’re doing, they’re selling arts or collectibles.
Next what is important is figuring out where the funds go. If it goes to the creators, that’s fine, but we see interesting examples of co-creation where some value flows back to the creators, but then a Dao among the NFT holders manages the pot of funds. From here, they decide if they want to upgrade the protocol, hire more artists, or add new drops — BAYC model with Mutant Apes, for example.
So when you do funding for a common treasury, as long as people have relative control and transparency over where that raises going, it would not necessarily fall into a security offering. It’s more an issue of speculation, are you actually getting something else out of the sale? So NFT sales that are like, I’m going to sell you a token, and then some artists are going to use funds raised from that token to then build an NFT or to make the art. Those are riskier, in terms of needing to register.
David: How should an NFT project be incorporated? Should they be incorporated?
Ross: The rehearsed answer is it always depends. It really will come down to what you’re trying to accomplish. Sometimes, a team or a group of artists might incorporate to have predictability in how they’re going to organize a sale or, like if they’re going to buy a subdomain. To run the NFT drop, it’s helpful for practical purposes, for accounting and banking, to have an entity for the core team.
In terms of the NFT community, it seems premature for them to incorporate unless they’re doing something other than holding NFT’s together as a collective. If the collective wants to execute on goals, have a party, buy a yacht club, they will want to have some sort of legal entity to enter into legal agreements to buy the Yacht Club. In other words, entities become relevant when people want to do something off-chain — hiring, for example — but the entire DAO does not have to follow that entity or be incorporated. They can have special purpose vehicles that are commandeered by the DAO, or hired by the DAO, to do these off-chain things.
The Bankless model I’ve seen that has worked so far is there’s an LLC that produces the media — runs the newsletter, the YouTube channel — and gets funded in grants of $BANK token from the DAO. Thus, they’re able to do things off-chain under sort of a trust or legal agreement with the DAO. In conclusion, it’s a matter of practical necessity. If you want to do something with another business, usually you want to have an entity rather than expect an individual contributor to take on the liability and risk of doing something on behalf of the DAO. Also, there’s the immediate advantage of adding legitimacy and some legal predictability. If you’re trying to do something that creates any sort of liability, anything you do off chain, entering into any contract, like for renting a venue or you know, buying things online, you basically do want to have something that’s not your personal bank account attached to it. It allows an organization to take more risks, to operationalize more efficiently, to pay people that can open bank accounts and do the practical things that aren’t handled entirely by smart contracts. As smart contracts become easier to use and more value can held in smart contracts, legal entities will be less relevant. But we’re not quite there yet.
David: What do you think about FWB using a C Corp legal structure?
Ross: That’s actually a really interesting case study. I have talked to lawyers about web because I was curious how they handled the investment from Andreessen and other VCs. The word on the street was that when they did those token swaps, or sales, they actually still didn’t have an entity at that point. It was just basically a handshake agreement or sale of the FWB tokens to these investors. If they have incorporated at this point, like a C Corp, then I assume that they probably just want some off chain entity to run the events now that they’ve sort of stumbled onto that that is the product, or service, of WB. It’s premature for a lot of DAOs to do a C-Corp. Often, the C Corp format is to fund software developer companies that then might exit the community. They might do a token launch to give governance to users but, before that, they want to fund their operations. C Corps have a lot of corporate formalities compared to an LLC. Thus, people that are looking to remain nimble, like developers, often don’t want to use a C Corp, unless, they’re trying to take on investments or issue a SAFE. The point here is they have been very vague about what their entity setup is, and who is running the show. There’s no entity listed on fwb.help. If they did a social DAO token sale, and then did the C Corp, which seems to be what you’re suggesting, I wouldn’t recommend that format. If you already have a tokenized community and a DAO, why embrace a C Corp? They may have done it to fund a venture, and then eventually capture the collective value of having a token in our community. This is a philosophical point but I agree with Jesse Sloss and other people in Seed Club that the networks in DAOs are more valuable than companies. They can scale, coordinate in realtime and internationally. If you already have a DAO, and you have a way to do a token distribution that’s fair, and can allow you to avoid registration requirements, then you should just lean into that is my recommendation. I may be confused about the current or past state of FWB, but I would not recommend people who already have a social DAO to incorporate as a C Corp.
David: If they should be incorporated, where are a lot of them doing it? We know for DAOs, The Caymans and Singapore are popular jurisdictions.
Ross: Investment clubs, which are a very popular format for DAOs, do well forming LLCs. Delaware is one of the most mature states for corporate law. Several DAO investment clubs, Meta Cartel Ventures for example, have started there and have had good success and legal predictability. LLCs are good when you expect every member to be involved. Keep that to a reasonable size, though investment clubs have sort of a hard cap at 99 members. Overall, an LLC is an easy format to manage your legal risks and to make investments as a DAO.
Non-profit protocols or DAOs that want structure and predictability about who’s responsible for paying taxes have used unincorporated nonprofit associations. Wyoming and Delaware both have their own UNA laws. I believe there is a DeFi protocol, Idle Finance, that is going to use a UNA.
For those that want to do a token launch, not so much as a DAO but as a team, I’ve seen a preference for offshore jurisdictions, because of the mitigated risk in terms of doing a registered offering. I’ve seen a British Virgin Islands as the most popular destination to do a token issuance vehicle. Generally, that is because there are good privacy laws there. If you’re going to do an offshore token sale or exclude U.S. residents, because you want to have an exemption under Reg S — or generally just don’t want to attract the attention of the SEC — offshore jurisdictions, such as the BVI and Caymans, have been popular.
Largely though, the DAOs that I see operating in the space — and in the US particularly — either have a club that’s entirely wrapped by an LLC, and usually does have non transferable shares to control who they’re doing business with.
David: How do you think the American regulators will regulate NFTs?
Ross: In terms of regulatory focus on NFT’s, I think we’ll see a lot more attention on promoters of NFT’s who don’t disclose their financial interest in the launch. We see a lot of celebrities do NFT sales when it is not transparent to the public how much money they are getting to promote NFTs. The Fair Trade Commission, much less the SEC will care about the lack of disclosure there. Then, like I said, NFTs that are sold to fund a team to build something like a product, or to fund people that are going to produce profits for the holders through airdrops or through royalty streams we’ll see get regulator’s attention. But by and large, I think most NFTs are fairly straightforward. They’re collectibles, their access points to a discord or community, and I don’t think those are offensive to regulators.
A Recap of Flux w/ Chase Chapman - March. 9th
This week on Flux we were lucky enough to be joined by Chase Chapman. Chase is a contributor to many DAO’s and protocols as well as being a model UN nerd. If you haven’t listened to the interview yet you can find it here. Once you’ve listened to this episode I’m sure you’ll want to hear more from Chase and lucky you, she has a podcast called On The Other Side.
Key Takeaways:
Why Index Coop has become the model for contributor structure: The culture of Index is open and honest with critical feedback, allowing for effective experimentation and rapid iteration on ideas. Adding ownership through tokens leads to an organization with people that care deeply are willing to fail when trying new things.
What is hindering the developer experience in web3: The biggest problems in developer experience right now are scaling audits and creating more modular smart contracts. Chase has some really interesting ideas around using staking to audit contracts in a decentralized manner. Moreover she thinks that pre-audited modular contracts that utilize this staking mechanism could make it much simpler for new to web3 devs to start shipping code faster.
What is the most impactful thing people can do to make DAOs more efficient: Writing shit down. Changing a DAO’s organizational structure from implicit to explicit via good documentation is a step change in its efficiency. The fluid nature of DAO contribution means that all systems need to have a bus factor of >1. This is especially important when it comes to onboarding. Contributors should be able to add value without ever speaking to someone.
Want to get involved in Twali Wrapped, writing or being interviewed? Reach out to David Feld (David C R Feld#4743) on discord to do so!
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