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The Ethereum network has made significant strides with the recent Shapella upgrade, marking a critical milestone in its journey from Proof-of-Work (PoW) to Proof-of-Stake (PoS) consensus. This long-awaited update promises increased efficiency and scalability while introducing new opportunities and challenges for users, developers, and investors. As Ethereum's landscape evolves, stakeholders must understand the potential legal implications that may arise from this transition. Background on Ethereum's Transition from PoW to PoS Since its inception, Ethereum has relied on a PoW consensus mechanism, which requires miners to solve complex mathematical puzzles to validate transactions and maintain network security. However, this approach has significant drawbacks, such as high energy consumption, environmental concerns, and a tendency toward centralization. Ethereum's development team has been working on a multi-stage transition to a PoS consensus mechanism to address these issues. PoS relies on validators who lock up a certain amount of cryptocurrency as collateral (or "stake") to propose and validate new blocks. This approach consumes far less energy and encourages a more decentralized network. Validators are randomly chosen to propose and validate new blocks based on their staked amount. The Shapella Upgrade The Shapella upgrade is the latest and final step in Ethereum's transition to PoS. The Shapella upgrade enables Ethereum stakers and validators to withdraw their deposits from the Beacon Chain for the first time. This leads to increased participation in Ethereum's staking ecosystem and drives the platform's stake rate closer to the average of top PoS networks. Legal Considerations As the Ethereum ecosystem evolves, stakers and validators may face various legal risks and regulatory compliance requirements: such as taxation, securities regulations, Anti-Money Laundering (AML), and Know Your Customer (KYC) regulations. As Ethereum undergoes the Shapella upgrade, DeFi platforms and protocols must adapt to the changes brought about by the transition to PoS. Key areas of impact may include: Staking Services: With the introduction of validator withdrawals, DeFi platforms offering staking services must update their infrastructure and smart contracts to facilitate these withdrawals, ensuring users can access their staked assets and rewards. Liquid Staking Derivatives (LSDs): DeFi protocols providing LSDs must adjust their offerings to accommodate the new withdrawal capabilities introduced by the Shapella upgrade. This may involve updating smart contracts and user interfaces to enable withdrawals and address potential price discrepancies between LSD tokens and the underlying ETH. Network Fees and Gas Prices: As Ethereum transitions to PoS, network fees, and gas prices may change, affecting the cost and efficiency of transactions on DeFi platforms. Developers must monitor these changes and optimize their platforms and protocols accordingly. The transition to PoS also raises legal considerations for smart contract developers and users: Smart Contract Liability: As smart contracts become more complex and integral to the PoS ecosystem, developers may face increased liability for potential flaws, vulnerabilities, or unintended consequences. It is crucial to perform thorough audits and testing to minimize risks and protect users. Intellectual Property: Smart contract developers should be aware of intellectual property rights related to their work, including copyright, patents, and trade secrets. Proper licensing and protection can help safeguard their creations and minimize legal disputes. Data Privacy and Security: In the PoS environment, smart contract developers and users must consider data privacy and security regulations, such as the General Data Protection Regulation (GDPR) in the European Union. Compliance with these rules is essential to protect user data and avoid potential penalties. Regulatory Compliance: As DeFi continues to grow and evolve in the PoS era, developers and users should stay informed about potential regulatory changes that may impact their activities, including securities regulations, AML/KYC requirements, and tax obligations. Securities and Tax Law Implications Classification of Ethereum and Related Tokens under Securities Laws: While Ethereum's native currency, Ether (ETH), is generally not considered a security, the Shapella upgrade could potentially impact the classification of other tokens built on the Ethereum network. Developers and token issuers should monitor regulatory developments and seek legal guidance to ensure compliance with securities laws. Tax Treatment of Staking Rewards: The Shapella upgrade introduces the ability for validators to withdraw their staking rewards, which could have tax implications for investors. In many jurisdictions, staking rewards may be considered taxable income. The Prokopiev Law Group is committed to helping its Web3 clients navigate the complex and emerging legal environment surrounding the Shapella upgrade and Ethereum's transition to PoS. Our team of legal experts stays up-to-date with the latest developments. It offers tailored guidance to help clients understand and address the legal implications of their activities in the Ethereum ecosystem. DISCLAIMER: Information on this site is for general educational purposes only, not legal, tax, or accounting advice. Consult professionals for guidance. The author's opinions don't represent others. No guarantees or warranties for content accuracy/completeness. The author is not liable for losses from using this information.

Over the past decade, the rapid expansion of blockchain technology has given rise to various cryptoassets such as Bitcoin, Ethereum, and other cryptocurrencies. Initially developed as a decentralized alternative to traditional financial systems, cryptoassets have permeated numerous sectors, including banking, trading, insurance, and intellectual property rights management. The British Virgin Islands (BVI) and the Cayman Islands have emerged as the preferred jurisdictions for many developers and entrepreneurs seeking to incorporate cryptocurrency exchanges, structure crypto-asset funds, or establish blockchain enterprises. The combination of favorable tax regimes, well-established legal systems, and business-friendly environments has contributed to the popularity of these offshore jurisdictions for crypto-related ventures. As a result, when disputes or issues arise concerning cryptoassets—such as unfulfilled trades, frozen accounts, or misappropriation—there is a high likelihood that a BVI or Cayman Islands-based entity is involved. Consequently, understanding the legal landscape and available remedies in these jurisdictions is essential for anyone engaging in crypto-related activities. Legal Landscape in the BVI and the Cayman Islands 2.1. Reliance on English Law and Case Precedents The BVI and Cayman Islands courts often rely on English law when addressing crypto-related disputes, as there currently needs to be more local legislation or case law on this subject. Decisions made by the English Court of Appeal and the UK Supreme Court are highly persuasive, even though they are not binding in these jurisdictions. Additionally, the Privy Council's decisions on appeals originating from other Commonwealth countries also influence the legal frameworks of the BVI and the Cayman Islands. Recent developments have clarified how the law applies to and governs cryptoassets, providing invaluable guidance for the BVI and Cayman Islands courts as they navigate this emerging field. Local Legislation and Jurisdictions In the BVI and the Cayman Islands, there has been a growing body of case law concerning cryptoassets, although it remains limited compared to England. Key decisions in these jurisdictions have primarily echoed the stance taken by English courts, which treat cryptoassets as a form of property. As the legal landscape continues to evolve in response to the rapid growth of cryptoassets, the BVI and the Cayman Islands will likely develop their own local legislation and case law to address the unique challenges and opportunities presented by this emerging technology. Holding and Managing Cryptoassets Centralized Exchanges Centralized exchanges are the most common way people hold and manage their cryptoassets. These platforms often facilitate trading, staking, earning crypto 'interest,' and providing other services. Although they may resemble traditional banks or brokers, the reality is different. The rights and obligations between a user and a centralized exchange can vary significantly from those in a traditional banking relationship. For instance, exchanges may co-mingle clients' cryptoassets, hold them in non-segregated accounts, exclude trust relationships through contracts, loan assets without notice or authorization, or treat cryptoassets differently than one might expect from a fiduciary. Software Wallets Software wallets offer a more secure alternative to centralized exchanges. These digital wallets store the user's private keys and cryptoassets on a computer or mobile device, allowing users to manage their assets independently. While software wallets reduce the risks associated with centralized exchanges, they also place the responsibility of safeguarding private keys and assets squarely on the user. Hardware Wallets Hardware wallets are considered the most secure way to hold and manage cryptoassets. These physical devices store the user's private keys offline, protecting them from hacking and other digital threats. Like software wallets, hardware wallets require users to safeguard their assets. However, they also provide the most robust protection against the risks of holding cryptoassets on centralized exchanges. Each method of holding and managing cryptoassets has unique advantages and challenges, making it crucial for users to carefully consider their options and prioritize security, convenience, and risk tolerance when choosing how to manage their digital assets. Cryptoassets as Property Traditional Categories of Property Traditionally, common law recognizes two forms of property: things in possession (physical items) and things in action (rights capable of being enforced). Cryptocurrencies need to fit neatly into both categories, which has led to debates about their legal status as property. Cryptoassets as Property in English Law In 2019, the UK Jurisdictional Taskforce on Cryptoassets and Smart Contracts (UKJT) published a legal statement arguing that a strict interpretation of property categories would be unsuitable and that there were solid grounds for recognizing cryptocurrencies as property. Following the UKJT Statement, the landmark case of AA v Persons Unknown confirmed that cryptocurrencies should be treated as property under English law. This decision relied on Lord Wilberforce's definition of property, which included criteria such as being definable, identifiable by third parties, capable of assumption by third parties, and having some degree of permanence. Cryptoassets as Property in BVI and Cayman Islands Law Like English law, the BVI and Cayman Islands have also accepted the principle that cryptoassets constitute property. In the BVI case of Torque Group Holdings Limited (In Liquidation) v Torque Group Holdings Limited (In Liquidation), it was determined that cryptoassets are property under the BVI Insolvency Act 2003 (as amended). This recognition has important implications for legal remedies available in cases involving cryptoassets, including freezing injunctions, proprietary injunctions, disclosure orders in support of injunctions, and Norwich Pharmacal relief. Can Cryptoassets be Held on Trust? The question of whether cryptoassets can be held on trust has emerged in case law over recent years. Trust law is a critical aspect of property law that governs the management and control of assets for the benefit of others. Establishing whether cryptocurrencies can be held on trust is essential for understanding the rights and obligations of parties involved in crypto transactions. Trust Law Principles Applied to Cryptoassets Courts in England, Singapore, and New Zealand have confirmed that cryptoassets can indeed be held on trust. In the English case of Wang v Darby, the High Court considered for the first time whether cryptocurrencies could be held on trust for the purpose of establishing a proprietary right over those assets. While it was determined that no form of trust arose in that particular case, the High Court demonstrated its willingness to apply trust law principles to a proprietary claim over cryptoassets in appropriate cases. The recognition that cryptoassets can be held on trust has significant implications for the legal landscape in the BVI and the Cayman Islands. It further solidifies the status of cryptoassets as property and expands the range of legal remedies available to parties involved in crypto-related disputes. Legal Remedies in Crypto-Related Disputes Freezing injunctions are court orders that prevent a party from disposing of or dealing with their assets, including cryptoassets. These orders are particularly useful in cases where there is a risk that the defendant may dissipate their assets before judgment can be enforced. Proprietary injunctions are a type of injunction that explicitly targets the disputed property. In cryptoassets, a proprietary injunction can be used to prevent the transfer or disposal of the disputed cryptocurrency. Disclosure orders are court orders that require a party to disclose certain information, typically about the location or control of assets. In crypto-related disputes, disclosure orders can help to trace and recover misappropriated cryptoassets. Norwich Pharmacal relief is a form of pre-action disclosure that requires a third party, such as an exchange or a wallet provider, to provide information to assist the claimant in identifying the wrongdoer. Norwich Pharmacal Relief can help trace the movement of stolen cryptoassets and identify the individuals responsible in crypto-related disputes. The Future of Cryptoassets and Legal Remedies in Offshore Jurisdictions The growth of cryptoassets in offshore jurisdictions like the BVI and the Cayman Islands has increased crypto-related disputes. As courts in these jurisdictions increasingly rely on English law and case precedents, the legal landscape surrounding cryptoassets continues to evolve. By recognizing cryptoassets as property and applying trust law principles to these assets, courts have expanded the range of legal remedies available to parties involved in crypto-related disputes. As the crypto industry continues to grow and develop, the legal landscape will likely continue to adapt to meet the challenges and opportunities presented by this innovative technology. DISCLAIMER: The information provided is not legal, tax, or accounting advice and should not be used as such. It is for discussion purposes only. Seek guidance from your legal counsel and advisors on any matters. The views presented are those of the author and not any other individual or organization. The information provided is for general educational purposes only and is not investment advice. The author of this material makes no guarantees or warranties about the accuracy or completeness of the information. A professional should review any action based on the information discussed. The author is not liable for any loss from acting on the information discussed.

Non-fungible tokens (NFTs) have recently emerged as groundbreaking innovations in art and creative industries, generating considerable buzz and excitement. These unique digital assets, built on blockchain technology, have unlocked new possibilities for artists, collectors, and investors alike. NFTs, with their distinct attributes, are revolutionizing how creators showcase, sell, and monetize their work in the digital realm. At the core of NFTs lies non-fungibility, distinguishing them from traditional currencies. This characteristic implies that each NFT is one-of-a-kind and cannot be exchanged on a one-to-one basis with another NFT. This exclusivity and provable scarcity have propelled NFTs to gain immense value, not unlike the high-priced traditional art market. NFTs encompass a wide array of digital creations, ranging from visual art and music to virtual real estate and collectibles. Significantly, when someone acquires an NFT, they are not purchasing the underlying artwork or media itself but rather a digital certificate of ownership and authenticity recorded on the blockchain. The intersection of NFTs and the art world also presents a complex legal landscape, particularly regarding intellectual property (IP) rights. As artists and investors venture into this uncharted territory, understanding the nuances of IP law and how it applies to NFTs is crucial to safeguard their interests and ensuring compliance. Copyright Basics Navigating the world of NFTs requires a firm grasp of the underlying intellectual property rights, particularly copyright law. Copyright protection is granted to original works of authorship fixed in a tangible medium of expression. This protection extends to various forms of creative expression, such as literature, music, visual art, and more. Copyright owners are granted exclusive rights over their creations, including the ability to reproduce, distribute, display, and create derivative works based on the original. When acquiring an NFT, the buyer does not automatically obtain the copyright to the underlying work. Instead, they receive a digital certificate of ownership and authenticity, while the original creator typically retains the copyright. Copyright Principles: Fair Use, Public Domain, and First Sale Doctrine Several vital principles govern the application of copyright law in the context of NFTs. First, the doctrine of fair use permits limited use of copyrighted material without obtaining permission as long as the use is considered "transformative." Examples of fair use include educational purposes, commentary, criticism, and parody. Second, some works fall into the public domain, meaning they are no longer protected by copyright law and can be used freely. Works enter the public domain after their copyright term expires or if they were never eligible for copyright protection in the first place. Lastly, the first sale doctrine limits the exclusive rights of copyright owners. This doctrine allows the lawful owner of a copyrighted work to sell, lend, or otherwise dispose of that work without infringing on the original copyright. However, it does not grant them the right to reproduce or create derivative works. Ensuring Originality and Avoiding Copyright Infringement One of the primary challenges in the NFT space is ensuring the originality of the minted artwork and avoiding copyright infringement. Creators must be cautious not to incorporate copyrighted elements from other works without permission. If a work is substantially inspired by or directly copies another piece of art, obtaining written permission or consulting an attorney for guidance on fair use or public domain considerations is vital. Ownership and Licensing of Intellectual Property Rights Determining the ownership and licensing of intellectual property rights associated with NFTs can be complex. When minting and selling an NFT, the creator usually retains the copyright to the underlying work. However, clarifying the terms of sale, including any licensing agreements or copyright assignments, is essential to avoid disputes and ensure a smooth transaction. For NFT buyers, understanding the scope of the rights acquired is crucial. Acquiring an NFT does not automatically grant the buyer copyright ownership or the right to reproduce, distribute, or create derivative works based on the original. These rights must be explicitly addressed in the sales contract or through separate licensing agreements. Navigating Commissioned Work and Work-for-Hire Arrangements In some cases, the creator of a piece of art may not hold the copyright, such as when the work is commissioned or created within the scope of employment under a work-for-hire arrangement. In these situations, attempting to mint an NFT without proper authorization can result in copyright infringement liability. Artists and NFT creators need to understand the terms of their work arrangements, clarify the ownership of intellectual property rights, and obtain necessary permissions before minting and selling NFTs. Assignments and Licensing Agreements When dealing with copyrights in NFT transactions, creators and buyers must know the distinction between assignments and licensing agreements. Assignments involve the transfer of ownership of the copyright, whereas licensing agreements grant specific rights to use the copyrighted work without transferring ownership. In many cases, NFT transactions will involve licensing agreements rather than full copyright assignments. These agreements should clearly outline the scope of the rights granted, the duration of the license, and any applicable royalties or fees. Drafting and reviewing these agreements carefully is crucial to ensure all parties understand their rights and obligations. Ensuring Proper Transfer of Rights in NFT Sales When an NFT is sold, transferring the associated intellectual property rights is not automatic. To ensure the proper transfer of rights, the sales contract must explicitly address the assignment or licensing of the copyright, as well as any other relevant intellectual property rights. Buyers should carefully review the sales contract to understand the scope of the rights they are acquiring, and creators should ensure they are comfortable with the terms of the transfer. If necessary, consult an attorney to help draft or review the sales contract and any associated licensing agreements to ensure all parties' rights are protected and clearly defined in the NFT transaction. Leveraging NFTs for Royalty Streams and Monetization One of the most attractive features of NFTs for artists and creators is the potential for ongoing royalty streams. Smart contracts can be programmed to automatically distribute a percentage of the proceeds from future sales to the original creator, providing a passive income source and incentivizing artists to create and sell NFTs. Consulting with Intellectual Property Attorneys Navigating the legal landscape surrounding NFTs and intellectual property rights can be complex and challenging. Consulting with an experienced intellectual property attorney is essential to protect your rights and interests. At Prokopiev Law Group, our experienced intellectual property attorneys are well-versed in navigating the complex legal landscape surrounding NFTs. We can provide expert guidance on copyright and licensing issues, help draft and review contracts, and ensure compliance with relevant laws and regulations. By partnering with us, creators can confidently explore the potential of NFTs, maximize their benefits, and minimize legal risks, allowing them to fully embrace the exciting opportunities in this rapidly evolving digital space. DISCLAIMER: The information provided is not legal, tax, or accounting advice and should not be used as such. It is for discussion purposes only. Seek guidance from your legal counsel and advisors on any matters. The views presented are those of the author and not any other individual or organization. The information provided is for general educational purposes only and is not investment advice. The author of this material makes no guarantees or warranties about the accuracy or completeness of the information. A professional should review any action based on the information discussed. The author is not liable for any loss from acting on the information discussed.

The U.S. Department of the Treasury recently published a comprehensive report examining the risks associated with Decentralized Finance (DeFi) and its potential impact on financial stability, national security, and consumer protection. As the crypto landscape continues to evolve rapidly, it is essential for businesses operating in this space to stay informed about regulatory developments and risk management practices. We delve into the most critical insights from the Treasury's DeFi Risk Report, highlighting the key findings and recommendations in bullet points below: The extent to which a claimed DeFi service is genuinely decentralized depends on the specific facts and circumstances. This risk assessment reveals that DeFi services frequently have a central organization that offers a certain level of centralized management and governance. The assessment reveals that illegal actors, such as ransomware cybercriminals, thieves, and fraudsters, utilize DeFi services to transfer and launder their illegal earnings. They exploit weaknesses in U.S. and international AML/CFT regulations, supervision, enforcement systems, and the technology supporting DeFi services. A DeFi service operating as a financial institution, as defined by the Bank Secrecy Act (BSA), must comply with BSA obligations, including AML/CFT requirements, regardless of whether the service is centralized or decentralized. A DeFi service's assertion that it is or intends to be "completely decentralized" does not alter its classification as a financial institution under the BSA. In certain instances, industry providers might intentionally attempt to decentralize a virtual asset service to evade AML/CFT responsibilities, not realizing that these obligations still apply as long as they offer covered services. Concurrently, some DeFi services with unclear organizational structures may pose significant difficulties for supervision and, in cases where DeFi services fail to comply with AML/CFT requirements, enforcement of relevant legal and regulatory obligations. According to the Financial Action Task Force (FATF) standards, the global body responsible for setting AML/CFT benchmarks, DeFi services without an entity possessing adequate control or influence might not be explicitly subject to AML/CFT requirements. This could result in potential gaps for DeFi services in other jurisdictions. Another weakness is foreign nations' insufficient implementation of international AML/CFT standards. This allows malicious actors to exploit DeFi services without consequences in jurisdictions that lack proper AML/CFT regulations. Utilizing data from public blockchains and developing industry-driven compliance solutions for DeFi services can help reduce some illicit finance risks. However, these measures and the transparency provided by public blockchains do not adequately address the identified vulnerabilities. Blockchain analytics cannot replace regulated financial intermediaries' crucial role in implementing AML/CFT controls. Various potential solutions aim to support compliance with AML/CFT obligations while maximizing user privacy. These include digital identity technology for identity verification by DeFi services, informed by users' transaction history on public blockchains. Zero-knowledge proofs can allow users to confirm their identity has been verified without disclosing personal information. Industry solutions may also integrate illicit finance risk mitigations into smart contract code, such as limiting transaction frequency, setting threshold limits for specific customer types, or using oracles to screen against sanctioned virtual asset wallet addresses and prevent their use of DeFi services. We encourage you to follow our updates and insights to stay informed about new developments and ensure compliance with changing regulations. Together, we can navigate the complexities of the DeFi ecosystem and maximize its potential while adhering to legal requirements. DISCLAIMER: The information provided is not legal, tax, or accounting advice and should not be used as such. It is for discussion purposes only. Seek guidance from your legal counsel and advisors on any matters. The views presented are those of the author and not any other individual or organization. The information provided is for general educational purposes only and is not investment advice. The author of this material makes no guarantees or warranties about the accuracy or completeness of the information. A professional should review any action based on the information discussed. The author is not liable for any loss from acting on the information discussed.

Decentralized Autonomous Organizations (DAOs) have gained traction recently as a revolutionary way to conduct business in the digital age. DAOs, as decentralized and global entities, often face the challenge of determining which law applies to their operations. This article delves into the techniques for determining the applicable law for DAOs and the challenges they present. Techniques for Determining Applicable Law A choice of law clause allows parties to select a specific jurisdiction to govern their contractual relationship. DAOs can incorporate such clauses in their 'user agreements' (if any) or within their governance framework. One approach is identifying a jurisdiction with favorable regulations for blockchain technology and digital assets and choosing its laws to govern the DAO's activities. Alternatively, DAOs could implement a system where each member's local jurisdiction governs their interactions with the organization, considering the decentralized nature of DAOs. Determining the place of performance can help identify the applicable law without an express choice. If it is possible to decide on DAOs, their place of performance could be the location of the smart contract execution, the location of the token issuer, or the location where the majority of the DAO's activities occur. DAOs could establish a clear place of performance within their operational guidelines or utilize a jurisdiction-agnostic approach based on blockchain-specific rules. The lex loci contractus principle refers to the law of the place where the contract was made. In the context of DAOs, this could be interpreted as the jurisdiction where the smart contract was created or deployed. To facilitate the application of this principle, DAOs could specify in their governance documents which jurisdiction's laws will apply. The lex fori principle asserts that the law of the forum where the dispute is adjudicated governs the procedural aspects of a case. DAOs could adopt dispute resolution mechanisms tailored to their decentralized structure, such as decentralized arbitration platforms or smart contract-based dispute resolution systems. This would enable DAOs to resolve disputes within the blockchain ecosystem while minimizing conflicts between different legal systems. Challenges in Applying Traditional Legal Frameworks to DAOs The decentralized nature of DAOs complicates the application of traditional legal frameworks, as they often rely on centralized decision-making and control. DAOs can mitigate this issue by establishing clear governance structures and incorporating legal entities to interface with traditional legal systems. DAOs often operate across multiple jurisdictions, making determining which jurisdiction's laws should apply difficult. To address this challenge, DAOs could adopt a choice of law clauses or consider the place of performance, as discussed earlier. Moreover, promoting collaboration between regulators and the blockchain industry could lead to developing harmonized international legal standards for DAOs, reducing jurisdictional conflicts. Consumer protection concerns arise in the context of DAOs, as traditional consumer protection laws may not easily apply to their decentralized structure. To address these concerns, DAOs could voluntarily implement consumer protection measures, such as transparent governance processes, dispute resolution mechanisms, and risk disclosures. Dispute Resolution Mechanisms Traditional court systems can provide a framework for resolving disputes involving DAOs, particularly when there is a clear jurisdictional connection. However, traditional courts may need more technical expertise to understand the complexities of DAOs and blockchain technology, potentially leading to suboptimal resolutions. Arbitration and mediation can offer more flexible and efficient alternatives to traditional courts for resolving disputes involving DAOs. These methods can be tailored to the parties' specific needs and may be better suited to handle the complex technical aspects of DAO-related disputes. By incorporating arbitration or mediation clauses in their governance structures, DAOs can ensure that experts resolve disputes more efficiently and cost-effectively. Blockchain-based dispute resolution represents a novel approach to handling disputes involving DAOs. These systems leverage smart contracts and decentralized platforms to provide a transparent, secure, and efficient method for resolving conflicts. For example, platforms like Kleros and Aragon Court use decentralized voting systems to help resolve disputes within their ecosystems. By integrating blockchain-based dispute resolution mechanisms into their governance structures, DAOs can benefit from a dispute resolution process that aligns with their decentralized ethos and leverages the power of blockchain technology. In conclusion, determining the applicable law and dispute resolution mechanisms for DAOs remains a complex and evolving area of law. Given the decentralized nature of DAOs and their unique challenges, there still needs to be more straightforward answers to many legal questions. However, with the assistance of experienced lawyers, DAOs can navigate these uncertainties and address crucial legal aspects while anticipating future regulatory developments. Prokopiev Law Group can help DAOs effectively manage their legal risks and foster a successful and compliant decentralized organization by combining expertise in traditional legal frameworks with a profound understanding of emerging technologies. DISCLAIMER: The information provided is not legal, tax, or accounting advice and should not be used as such. It is for discussion purposes only. Seek guidance from your legal counsel and advisors on any matters. The views presented are those of the author and not any other individual or organization. The information provided is for general educational purposes only and is not investment advice. The author of this material makes no guarantees or warranties about the accuracy or completeness of the information. A professional should review any action based on the information discussed. The author is not liable for any loss from acting on the information discussed.

Artificial intelligence (AI) is increasingly used in various fields, from healthcare to finance. However, with the rise of AI comes new challenges and risks that must be addressed. To this end, the European Union (EU) has developed a new regulation to ensure AI's ethical and trustworthy use. This article will provide an overview of the EU's new AI regulation and what it means for businesses. Overview of the EU's New AI Regulation The EU's new AI regulation, which was proposed in April 2021, aims to establish a legal framework that promotes the development and use of AI while ensuring that it is used in a way that is safe and respects fundamental rights. The regulation is part of the EU's broader strategy on AI, which aims to strengthen Europe's technological and industrial capacity and ensure that AI is used in a way that benefits society as a whole. Scope of the Regulation The regulation will apply to AI developers and users, covering a wide range of AI systems, including those used in products and services provided to consumers. The regulation will also apply to AI systems used by public authorities and law enforcement agencies. Key Requirements of the Regulation The regulation will impose several requirements on AI developers and users, including: Prohibited Practices: The regulation will prohibit specific uses of AI, including those that threaten public safety or undermine human dignity. High-Risk AI Systems: The regulation will require that high-risk AI systems undergo a rigorous risk assessment before deployment. High-risk AI systems are those that are used in critical areas, such as healthcare and transport. Transparency and Traceability: The regulation will require that AI systems be transparent so users understand how the system works and how it makes decisions. It will also require that AI systems be traceable so that authorities can identify the persons or entities responsible for their development and use. Data Governance and Quality: The regulation will require that AI systems be developed using high-quality data and keep data up-to-date and accurate. It will also require that AI systems be developed using secure and reliable data management practices. Human Oversight and Control: The regulation will require that AI systems be subject to human oversight and control so that individuals can intervene and correct errors or unintended consequences. Implications for Businesses The new AI regulation will have significant implications for businesses that use AI systems. Companies will need to ensure that their AI systems comply with the regulation's requirements, including those related to risk assessment, transparency, and traceability. They will also need to ensure that their data governance and quality practices are up-to-date and meet the regulation's standards. At Prokopiev Law Group, we understand the complex legal landscape surrounding AI regulation, and we can help businesses navigate emerging legal requirements to ensure that they comply with numerous regulations. Our experienced attorneys can guide risk assessment, data governance, and human oversight and assist in developing compliance programs tailored to your business's specific needs. Contact us today to learn more about how we can help you navigate the emerging legal landscape of AI regulation. DISCLAIMER: The information provided is not legal, tax, or accounting advice and should not be used as such. It is for discussion purposes only. Seek guidance from your own legal counsel and advisors on any matters. The views presented are those of the author and not any other individual or organization. The information provided is for general educational purposes only and is not investment advice. The author of this material makes no guarantees or warranties about the accuracy or completeness of the information. A professional should review any action based on the information discussed. The author is not liable for any loss from acting on the information discussed.

Decentralized autonomous organizations (DAOs) employ smart contracts to establish their governing rules, which a core group of community members determines. These smart contracts provide a transparent, verifiable, and publicly auditable foundation for the DAO's operations, allowing any potential participant to understand how the protocol functions at all times. After inscribing these rules onto the blockchain, the DAO must determine how to secure funding and distribute governance powers. Typically, this is achieved through a token issuance, where the protocol distributes tokens to raise capital and fill the DAO's treasury. In return for their investment, token holders receive voting rights, usually proportional to their holdings. Once the funding process is complete, the DAO is ready for deployment. DAO code is activated upon deployment on the Ethereum blockchain. After the code is deployed, it can only be modified by achieving consensus through member votes. In other words, no single authority can alter the DAO's rules – the power lies entirely in the hands of the DAO's token holders. A few thoughts on how to create a DAO Begin by discussing with your peers the purpose of the DAO, its intended role, and operational structure. Human decision-making is required initially to identify opportunities, recruit collaborators, validate the need, and outline the processes to be automated through smart contracts. It is crucial to clarify the DAO's objectives with other enthusiasts to minimize the risk of disagreement over the governance structure. You will need an encrypted wallet for transactions and storage. Ownership in a DAO is usually tokenized and can be transferred to members in various ways. Standard methods include "airdrops" and "rewards." Airdrops distribute tokens to members based on their contributions and community behavior. Rewards are bonuses given to members who accomplish tasks and goals. Members can gain ownership by earning native token-based rewards or purchasing tokens through decentralized exchanges. Decide how decisions will be made once the DAO is established. The most common method is "token-weighted voting," where token holders vote, with each token representing one vote. Members submit ideas using tools like Snapshot, then vote based on other members' preferences, with outcomes that may be (or may not) executed automatically via smart contracts. Developing rewards and incentives for DAO members and contributors foster trust. Native governance tokens may be distributed to members and contributors using DeFi protocols. DAOs may also reward contributions with cryptocurrencies or even with titles and ranks. After the DAO conceptualization phase ends, the reward structure can be further refined. There may be different types of DAOs, for example: Protocol DAOs: governance structures where tokens serve as a voting metric for implementing protocol changes. Collector DAOs: for artists using NFTs to establish art ownership. Operating systems: standalone platforms for organizations to create their DAOs. Service DAOs: talent hunting and support acquisition models. Investment DAOs: pool capital for democratized investing. Grant DAOs: community-contributed grant pools for funding innovative projects. Entertainment DAOs: decentralized entertainment where creators maintain governance control. Media DAOs: allow content owners to contribute directly for native token rewards. Social DAOs: collaboration platforms for crypto-based social networking. The DAO tension triangle represents a delicate equilibrium among three essential components: voice, exit, and loyalty. The ability of a DAO to respect an individual's sovereignty is reflected in the freedom to leave. Voice refers to the freedom for individuals to participate in decision-making, including joining, exiting, and voting on DAO choices. The governance mechanism is the DAO-specific design space associated with voice, focusing on protocol-related decisions and DAO improvement. Enhancing governance requires strengthening the voice and reducing exit incentives. Governance encompasses the legal structure, membership, purpose, operations, and voting mechanisms that facilitate the organization's creation and dissolution. The individual aspect, or exit, includes those who value self-government, the common good, and personal rights. This can also apply to registered or unregistered entities operating under their jurisdiction and treated as individuals. Loyalty relates to decentralization, combining technological and political aspects to create a belief system that shapes the characteristics of DAO participants. The level of decentralization and the people and motives behind a DAO are crucial factors influencing its trustworthiness. The degree of decentralization in each DAO varies, depending on its capabilities, purpose, and participation costs. Legal Challenges DAOs may face several legal issues due to their decentralized nature and the evolving regulatory landscape. Some of these challenges include: Legal recognition and status: As decentralized entities, DAOs might not be recognized as legal entities in many jurisdictions. This lack of legal status can create difficulties enforcing contracts, resolving disputes, and determining liability. Regulatory compliance: DAOs often operate across multiple jurisdictions, which can lead to complex compliance requirements. Ensuring adherence to anti-money laundering (AML) and know-your-customer (KYC) regulations and compliance with securities laws can be challenging for DAOs. Intellectual property rights: DAOs that deal with digital assets and non-fungible tokens (NFTs) might face legal challenges related to intellectual property rights, such as copyright and trademark infringement claims. Taxation: Tax regulations surrounding DAOs and their tokens often need to be clarified, making it difficult for members to accurately determine and report their tax obligations. This can lead to potential tax liabilities and penalties. Liability and dispute resolution: The decentralized nature of DAOs can make it difficult to determine individual liability for actions taken by the organization. Dispute resolution can also be challenging due to the need for centralized authority and the global nature of DAOs. Employment and labor laws: DAOs that rely on contributors and collaborators might face legal challenges regarding employment status, worker classification, and compliance with labor laws and regulations. Data protection and privacy: DAOs that collect, process, or store user data must navigate data protection and privacy regulations across multiple jurisdictions, which can be complex and burdensome. Governance and decision-making: As DAOs are governed by their members through token-based voting mechanisms, they may face legal challenges surrounding the legitimacy and enforceability of decisions made through these processes. Securities laws: DAO tokens can sometimes be considered securities by regulators, subjecting them to strict regulatory requirements and potential enforcement actions. Ensuring compliance with securities laws is a significant challenge for many DAOs. Consumer protection: DAOs offering products or services to consumers must navigate consumer protection laws and regulations, which can vary significantly between jurisdictions. * * * Prokopiev Law Group is dedicated to helping DAOs navigate the complex legal landscape and overcome challenges. With our deep understanding of the evolving regulatory environment and expertise in various legal areas, we provide tailored legal solutions that ensure compliance, mitigate risks, and enable DAOs to grow and thrive. By partnering with us, DAOs can focus on their core mission, confident that they have a trusted legal partner supporting their journey toward success and innovation. DISCLAIMER: The information provided is not legal, tax, or accounting advice and should not be used as such. It is for discussion purposes only. Seek guidance from your legal counsel and advisors on any matters. The views presented are those of the author and not any other individual or organization. The information provided is for general educational purposes only and is not investment advice. The author of this material makes no guarantees or warranties about the accuracy or completeness of the information. A professional should review any action based on the information discussed. The author is not liable for any loss from acting on the information discussed.

In the rapidly growing and evolving world of (cryptocurrency) virtual services, businesses must establish a robust User Agreement that protects the company and its users. This article aims to provide a comprehensive overview of the key elements that should be included in such agreements, highlighting the importance of each aspect and the legal consequences a company may face if these clauses are absent. 1. Eligibility and Compliance 1.1. Age Requirements A User Agreement must clearly define the minimum age requirement for users to access and use the platform's services to ensure legal compliance. This typically includes a statement that users must be of legal age (usually 18 years or older) or have parental consent. Without an age requirement clause, a company may inadvertently allow minors to access its platform, potentially leading to legal issues and reputational damage. 1.2. Geographical Restrictions A User Agreement should also specify any geographical restrictions that apply to the use of the platform. These restrictions may arise due to varying legal and regulatory requirements across jurisdictions. It is crucial for a company to be aware of the specific laws and regulations in the countries where its users are based and to exclude users from jurisdictions where its services are not permitted. If geographical restrictions are not clearly stated, the company may face legal consequences, such as fines or sanctions, for operating in restricted jurisdictions. 1.3. Compliance with Laws The User Agreement must emphasize that users comply with all applicable laws and regulations when using the platform's services. This includes but is not limited to, anti-money laundering (AML), know-your-customer (KYC), and counter-terrorism financing (CTF) regulations. By having this clause, the company can protect itself from potential legal liabilities arising from users engaging in unlawful activities. If compliance with the laws clause is absent, the company may be held accountable for any illegal actions on its platform, resulting in financial and reputational consequences. 2. Acceptance of Risks In a User Agreement, it is essential to outline various risks associated with using the platform and dealing with cryptocurrencies. This helps to ensure that users are fully aware of the potential consequences of their actions and protects the company from liability. 2.1. Cryptocurrency Risks The User Agreement should clearly state that the user acknowledges the inherent risks associated with cryptocurrencies, including price volatility, security threats, and the potential for loss of funds. Users take responsibility for their actions and investments by accepting these risks, reducing the company's liability. 2.2. Technical Risks The agreement must also highlight technical risks, such as software vulnerabilities, hardware failures, or network disruptions, which can result in losing funds or access to the platform. By including this clause, the company emphasizes that it cannot guarantee uninterrupted service and disclaims responsibility for any losses resulting from technical issues. 2.3. Regulatory Risks Users should be made aware of the potential regulatory risks, including the possibility of changes in laws or regulations that may affect the platform's operation or the value of cryptocurrencies. By acknowledging these risks, users accept that the company cannot be held responsible for any negative impacts of regulatory changes. 2.4. Market Risks The User Agreement should also mention market risks, such as price fluctuations, liquidity issues, and market manipulation. This helps users understand that the company has no control over market conditions and cannot be held responsible for any losses resulting from such risks. 2.5. Platform Risks The agreement should outline platform-specific risks, such as the possibility of system failures, security breaches, or unauthorized access. By including this clause, the company emphasizes that users accept these risks and agree to hold the company harmless in case of any issues. 2.6. No Refunds and No Returns Policy A User Agreement may state that no refunds or returns of cryptocurrencies are possible once transactions have been completed. This clause protects the company from potential disputes and ensures users understand the finality of transactions. 3. Limitation of Liability and Indemnification 3.1. Limitation of Liability The User Agreement may contain a limitation of liability clause that specifies the company's liability is limited to the extent permitted by law. This clause protects the company from excessive claims and helps to manage potential legal disputes. 3.2. Indemnification An indemnification clause in the User Agreement requires users to indemnify and hold the company harmless from any claims, damages, or losses resulting from using the platform or violating the agreement. This clause provides additional protection for the company by transferring the responsibility for potential legal issues to the user. 4. No Investment Advice or Recommendation The User Agreement should clarify that the company does not provide investment advice or recommendations regarding cryptocurrencies or other financial products. This helps protect the company from liability for any losses users incur based on their decisions. 5. Tax Implications Including a clause addressing the tax implications of using the platform and trading cryptocurrencies is essential. The User Agreement should state that users are solely responsible for determining and paying any taxes applicable to their transactions. To the extent the law permits, this may shift the responsibility for tax compliance to the user, protecting the company from potential legal issues. 6. Intellectual Property Rights The User Agreement should outline the company's intellectual property rights, including copyrights, trademarks, and patents related to the platform and its services. Users should agree not to infringe upon these rights and acknowledge that any unauthorized use may result in legal action. 7. Privacy Policy and Data Protection A User Agreement should reference the company's privacy policy and emphasize the importance of data protection. Users should agree to collecting, storing, and processing their personal information under the privacy policy. This helps to ensure compliance with data protection laws and regulations. 8. Amendments to the User Agreement The agreement should include a provision allowing the company to amend the User Agreement at its discretion. Users should be notified of any changes and agree to be bound by the updated terms. This allows the company to adapt the agreement to address new developments or regulatory requirements. 9. Governing Law and Dispute Resolution 9.1. Governing Law The User Agreement should specify the governing law, which determines the legal framework that will apply in the event of a dispute. This clause provides certainty for both the company and users by establishing the legal jurisdiction that will be used to interpret and enforce the agreement. 9.2. Dispute Resolution A dispute resolution clause should be included in the User Agreement, outlining the process for resolving any disputes between the company and users. Depending on the company's preference, this may involve negotiation, mediation, arbitration, or litigation. A transparent dispute resolution process helps to manage potential conflicts and minimize the risk of protracted legal battles. * * * Creating a comprehensive User Agreement tailored to a specific project's needs is crucial for mitigating legal risks and ensuring smooth operations in the dynamic crypto sphere. Prokopiev Law Group's experienced legal professionals can help you craft a robust User Agreement that addresses your project's unique aspects and requirements. Choosing Prokopiev Law Group means trusting an expert partner to navigate the complexities of crypto regulations and compliance. Our knowledge and experience will ensure your project is set up for success, allowing you to focus on growth. Contact Prokopiev Law Group today to solidify your project's legal foundation. DISCLAIMER: The information provided is not legal, tax, or accounting advice and should not be used as such. It is for discussion purposes only. Seek guidance from your own legal counsel and advisors on any matters. The views presented are those of the author and not any other individual or organization. The information provided is for general educational purposes only and is not investment advice. The author of this material makes no guarantees or warranties about the accuracy or completeness of the information. A professional should review any action based on the information discussed. The author is not liable for any loss from acting on the information discussed.

On March 14, the European Parliament endorsed new data regulations that could necessitate the incorporation of a kill switch in smart contracts to reset operations. The 2022 Data Act, an EU bill, aimed to provide individuals with greater control over data from smart devices but has raised concerns within the Web3 community. The bill received 500 votes in favor, 23 against, and 110 abstentions from EU legislators. During the bill's debate, lead legislator Pilar del Castillo Vera stated that the new regulations would enable consumers and businesses to decide how data generated by connected products are used. Del Castillo Vera's revised draft of the bill requires that smart contracts implement access controls, protect trade secrets, and include functions to pause or reset – stipulation experts fear could compromise their intended purpose. Only some people support the bill. Thibault Schrepel, an associate professor at VU Amsterdam University, expressed concerns about Article 30 on Twitter before the vote, stating that it "endangers smart contracts to the extent that no one can predict." Schrepel, a blockchain legal expert, contends that the legislation is vague about who would be responsible for activating a smart contract's kill switch and that it conflicts with the fundamental concept that no one can modify automated programs. While the EU Data Act aims to give people more control over their personal information, the Web3 community is concerned that mandating a kill switch in smart contracts could undermine decentralization and introduce security flaws. In information technology, administrators frequently employ kill switches to deactivate a device, network, or software in response to a security risk. When applied to smart contracts, a kill switch could terminate the contract or initiate a stop, fix, and re-launch process in case of a significant flaw or violation. One alternative to a classic kill switch is a pause function, which temporarily freezes the smart contract rather than destroying it. To avoid security risks, separate keys can be used for pausing and unpausing the contract and can be stored offline. A multi-signature approval protocol can be implemented to address centralization concerns, where emergency powers are granted for immediate action, while unpausing requires a quorum approval. Changing admin keys after a kill switch is used can further enhance security. Although achieving complete decentralization might not be possible, smart contract developers can deploy the pause functionality, separate keys, and establish a multi-signature approval process to maintain security and limit centralization. DISCLAIMER: The information provided is not legal, tax, or accounting advice and should not be used as such. It is for discussion purposes only. Seek guidance from your own legal counsel and advisors on any matters. The views presented are those of the author and not any other individual or organization. The information provided is for general educational purposes only and is not investment advice. The author of this material makes no guarantees or warranties about the accuracy or completeness of the information. A professional should review any action based on the information discussed. The author is not liable for any loss from acting on the information discussed.

On Tuesday, members of the European Parliament (MEPs) from the Economic and Monetary Affairs, as well as Civil Liberties, Justice, and Home Affairs committees, established their stance on three proposed legal frameworks addressing the financing aspects of the EU's Anti-Money Laundering and Counter-Terrorist Financing (AML/CFT) policies. The legislative package is comprised of: The EU "single rulebook" - a regulation encompassing provisions for customer due diligence, transparency of beneficial owners, and the utilization of anonymous tools like crypto-assets and novel entities such as crowdfunding platforms. This also covers aspects related to "golden" passports and visas. The text received 99 votes in favor, 8 against, and 6 abstentions. The 6th Anti-Money Laundering Directive - a directive featuring national provisions concerning supervision, Financial Intelligence Units, and accessibility for competent authorities to crucial and reliable data, such as beneficial ownership registers and assets in free zones. The text was approved with 107 votes in favor, 5 against, and no abstentions. The regulation sets up the European Anti-Money Laundering Authority (AMLA), which holds the supervisory and investigative authority to guarantee adherence to AML/CFT mandates. This text was endorsed with 102 votes in favor, 11 against, and 2 abstentions. Preventing money laundering and terrorist financing Based on the adopted texts, various entities, including banks, asset and crypto-asset managers, real and virtual estate agents, and top-tier professional football clubs, must verify the identity of their customers, possessions, and the company's controllers. These entities must also identify specific money laundering and terrorist financing risks within their industry sector and convey the information to a central register. To limit cash and crypto-asset transactions, MEPs aim to establish a maximum amount that providers of goods or services can accept for payments. They have set limits of €7,000 for cash payments and €1,000 for crypto-asset transfers when the customer's identity cannot be verified. Due to the evident risk of criminal exploitation, MEPs seek to prohibit citizenship by investment schemes ("golden passports") and enforce stringent AML controls on the residence by investment schemes ("golden visas"). Financial Intelligence Units Each member state should create a financial intelligence unit (FIU) to prevent, report, and combat money laundering and terrorist financing. FIUs must exchange information with one another and competent authorities and collaborate with AMLA, Europol, Eurojust, and the European Public Prosecutor's Office. Beneficial ownership information National FIUs and other competent authorities must be able to access beneficial ownership information, bank account details, and land or real estate registers to detect money laundering schemes and freeze assets promptly. Recognizing that certain commodities are appealing to criminals, MEPs also propose that member states collect information on ownership of items such as yachts, planes, and cars valued over €200,000 or goods stored in free zones. MEPs agreed that beneficial ownership is defined as holding 15% plus one share, voting rights, or any other direct or indirect ownership interest, or 5% plus one share in the extractive industry or a company with a higher risk of money laundering or terrorist financing. Registers for beneficial owners Data on beneficial ownership stored in national central registers should be digitally accessible, available in an EU official language and English, and include current and historical information for a specified period. The organization responsible for the central register will be able to request any necessary information from corporate and legal entities to identify and verify their beneficial owners. This information must be up-to-date and accessible to FIUs, AMLA, competent authorities, self-regulatory bodies, and obligated entities. Failure to provide accurate and sufficient data to registers will result in penalties. Entities responsible for central registers should be able to use suitable technology for conducting verifications. Information accessibility Following the latest Court of Justice ruling, MEPs determined that individuals with a legitimate interest, such as journalists, reporters, media organizations, civil society groups, and higher education institutions, should be able to access the register, including interconnected central registers. Their right to access will be valid for at least two and a half years. Member states will automatically renew access but may also revoke or suspend it if abused. Legitimate interest should apply without discrimination based on nationality, country of residence, or establishment. Consistent enforcement by AMLA The new AMLA will monitor risks and threats within and outside the EU, directly supervising specific credit and financial institutions based on their risk level. Initially, it will supervise 40 entities with the highest residual risk profile present in at least two member states, with a minimum of one entity chosen from each member state. To carry out its responsibilities, AMLA can require companies and individuals to provide documents and information, conduct on-site visits with judicial authorization, and impose sanctions of €500,000 - €2 million or 0.5-1% of annual turnover for significant breaches, and up to 10% of the total annual turnover of the obligated entity in the preceding business year. MEPs' position on the draft law includes extending the agency's competence to create lists of high-risk non-EU countries, giving AMLA the authority to mediate between national financial supervisors and settle disputes, supervise and investigate the national implementation of the single AML rulebook, ensure stronger oversight of supervisors in the non-financial sector, and receive whistleblower complaints. The agency's location will be determined during the Parliament and Council negotiations. Next steps Following confirmation during a plenary session in April, the European Parliament will be prepared to start negotiations on the AML/CFT package. DISCLAIMER: The information provided is not legal, tax, or accounting advice and should not be used as such. It is for discussion purposes only. Seek guidance from your own legal counsel and advisors on any matters. The views presented are those of the author and not any other individual or organization. The information provided is for general educational purposes only and is not investment advice. The author of this material makes no guarantees or warranties about the accuracy or completeness of the information. A professional should review any action based on the information discussed. The author is not liable for any loss from acting on the information discussed.

DAO governance is the backbone of decision-making within a decentralized organization. By defining who can make decisions and how they're made, you lay the foundation for your DAO's operations. Governance can range from a simple majority vote among a small group to an intricate network of individuals participating in large-scale decisions. As your DAO evolves, so should its governance structure. To kickstart this process, follow these eight steps to establish a robust and adaptable governance system: Determine voting eligibility Set the minimum participation threshold, also known as the quorum Define the pass-rate requirements Establish the voting duration Design your proposal process Outline the proposal structure Select the appropriate tools for on-chain and off-chain governance Conduct a trial vote, document the outcome, and refine your approach as needed! Now, let's explore each step in greater detail! Determine voting eligibility At the core of DAO governance is the voting process. It is crucial to decide who can vote and how they vote before selecting any tools or parameters. In the current DAO landscape, there are two main options: Token-based voting (using fungible tokens or NFTs) Wallet-based voting (typically employing multi-signature wallets or multi sigs) Governance token voting operates on the principle of 1 token = 1 vote, with the weight of a vote determined by the number of tokens a participant holds. The more tokens a person has, the more significant their voting power is. Governance tokens are cryptocurrencies created by DAOs and used in on-chain votes. They can be traded on exchanges, allowing anyone to buy and speculate on the tokens for potential profit. However, this means that DAO governance tokens may only partially represent the DAO's engaged members. Token-based voting is typically utilized by DAOs that: want to give more voting power to those with a higher financial stake; aim to be Sybil-resistant, avoiding the issue of multiple people holding more than one wallet; are large-scale and do not require knowledge of contributors' identities; want to conduct all governance processes on-chain. In wallet-based voting, specific wallets are authorized to vote, with the rule of 1 wallet = 1 vote. This can be achieved by setting up a multi-signature wallet requiring multiple transaction approvals. For example, a three-of-five multi-sig wallet would require three out of five linked wallet addresses to approve a transaction before it can proceed. Wallet-based voting is best suited for DAOs that: are comfortable with members linking their identities to wallet addresses to prevent sybil attacks (where one person creates multiple wallets to inflate their voting power artificially); want to eliminate the financial aspect of voting, ensuring voting power cannot be directly purchased. are smaller in scale; conduct governance processes primarily off-chain, then execute actions on-chain using the multi-sig. It is common for DAOs to begin as wallet-based organizations (voting with a multi-sig) and then evolve into token-based DAOs (voting with governance tokens) or more comprehensive governance mechanisms. In most instances, the key to a successful DAO lies in its ability to adapt and change over time. Establish minimum participation, also known as quorum Minimum participation, or quorum, refers to the required number of voters for a vote to be considered valid. This figure does not represent the number of "yes" votes but the total number of participating voters. Large DAOs with widespread token distribution may have relatively low quorums, even as low as 1% of token holders. On the other hand, DAOs that are wallet-based, use multi-sig voting and have highly active voting processes might require a quorum of 50% or more to execute transactions. Setting a minimum participation rate that is too high for your organization could lead to governance deadlocks. As a result, it might be more practical for DAOs to establish their minimum participation rate after completing a few votes and gathering data on average voter participation. Define pass rate The pass rate refers to the required percentage of "yes" votes for approval of a proposal. The proposed action is not executed if a vote fails to meet the specified pass rate. The pass rate can be adjusted when designing various governance flows for different proposal types. For instance, many DAOs opt for a majority pass rate for basic decisions. They might employ a super-majority (2/3rds) for more critical or contentious decisions, such as amending the charter or minting additional tokens. Determine the voting period The voting period is the duration for which a vote remains open. DAO members can cast their votes only within this specified timeframe. A seven-day voting period is standard among many DAOs, providing a whole week for members to review the proposal and vote. However, if your DAO requires quicker decision-making, a shorter voting period of three or five days might be more appropriate. In some cases, voting periods are followed by a timelock, which prevents the execution of the vote's outcome within that period. This serves as a security measure, allowing DAOs time to react if a harmful proposal is approved. For instance, with a seven-day timelock, the result of the vote can only be executed once the seven-day period has elapsed, after which the funds can be disbursed. Establish a proposal process Having determined the governance parameters—including voting eligibility, minimum participation, pass rate, and voting period—it's time to create a proposal process that informs members how to suggest new ideas and obtain funding for their implementation. The proposal process outlines the necessary steps for a proposal to evolve from a concept to execution. Consider this a step-by-step guide to securing funding for a new workstream. A sample proposal process might include the following: Assemble your team: Identify individuals interested in collaborating on the proposal. Proposals backed by a well-organized team are more likely to receive constructive feedback from the community. Share the proposal on the DAO's forum for feedback: Obtain input from the broader DAO membership, and consider incorporating a poll to gauge sentiment. Submit a revised draft if significant edits are needed: If DAO members suggest major revisions, it may be wise to present an updated draft. Post the proposal for an official vote on your DAO's voting platform: This could involve an off-chain vote, such as on Snapshot, or an on-chain vote using platforms like Aragon or Tally. Establish your proposal structure A proposal structure gives teams guidelines for what to include in their proposals. Think of it as a template for drafting proposals. A sample proposal structure might consist of the following: Title: The main subject of the proposal. Brief description: Summarize the proposal's objective in one or two sentences. Detailed description and funding request: Elaborate on the funding request and the intended use of the funds. Technical specification: Include this section if your proposal involves code changes or technical details that others may need to review. Metrics or key performance indicators: How will you assess and report team performance? Team description: Highlight the team's relevant experience. Select your tooling stack for on-chain and off-chain interactions A DAO tooling stack comprises all the tools required to function as an organization. This includes communication channels, contributor payment and rewards systems, and membership tracking tools. Conduct your initial trial vote, document the procedure, and adapt as necessary Think about organizing a trial vote that doesn't disburse funds or sends only a minimal amount. This trial vote lets you evaluate whether you need to tweak your governance parameters or modify your tooling stack. After completing the vote, record the process. This documentation will be valuable when you need to review and adjust your governance process in the future. It's crucial to experiment and adapt as you progress; having this documentation for reference will be beneficial. Navigating the legal aspects of DAO governance can be complex and challenging. Prokopiev Law Group is here to support your DAO in addressing legal concerns throughout the entire process. Our expertise in the field can help ensure your DAO's governance structure complies with applicable regulations and best practices, allowing you to focus on building and growing your decentralized organization with confidence. DISCLAIMER: The information provided is not legal, tax, or accounting advice and should not be used as such. It is for discussion purposes only. Seek guidance from your own legal counsel and advisors on any matters. The views presented are those of the author and not any other individual or organization. The information provided is for general educational purposes only and is not investment advice. The author of this material makes no guarantees or warranties about the accuracy or completeness of the information. A professional should review any action based on the information discussed. The author is not liable for any loss from acting on the information discussed.

Rollups have emerged as a promising solution to the scalability issues that blockchain networks face. With the rise of rollups, new legal issues need to be addressed. In this article, we will discuss the legal challenges surrounding rollups and what you need to know. 1. Regulatory Compliance One of the most significant legal challenges facing rollups is regulatory compliance. Depending on the jurisdiction, rollups may be considered financial instruments and, as such, may be subject to regulatory requirements. It is essential to understand the regulations in your jurisdiction and ensure that your rollup complies with all applicable laws. 2. Smart Contract Risk Rollups heavily rely on smart contracts to function, which introduces new legal risks. Smart contracts are self-executing agreements with the terms of the agreement being directly written into lines of code. As such, they can be challenging to change or update once deployed. Any errors in the code or vulnerabilities could result in losses for users. It is important to ensure that your smart contract code is secure and has been audited by a reputable third party. 3. Intellectual Property Issues Rollups involve creating and deploying new technologies, which can lead to intellectual property issues. It is crucial to ensure that your rollup does not infringe on the intellectual property rights of others. This includes conducting a thorough search of existing patents and trademarks to ensure that your rollup is not infringing on any existing intellectual property rights. 4. Governance and Dispute Resolution Rollups involve a complex set of rules and processes that govern their operations. Disputes may arise over the interpretation of these rules and processes, and it is vital to have a clear governance framework in place to resolve these disputes. This includes the development of transparent dispute resolution processes and mechanisms. 5. Privacy and Data Protection Rollups process large amounts of data, including personal information, introducing privacy and data protection issues. It is important to ensure that your rollup complies with applicable data protection and privacy laws. In conclusion, the rise of rollups has created new legal challenges that must be addressed. To ensure that your rollup is legally compliant, it is important to have a thorough understanding of the regulatory requirements in your jurisdiction, the risks associated with smart contract code, potential intellectual property issues, governance and dispute resolution, and privacy and data protection. If you need help with any of these legal issues, contact a legal professional with experience in blockchain and smart contract law. DISCLAIMER: The information provided is not legal, tax, or accounting advice and should not be used as such. It is for discussion purposes only. Seek guidance from your own legal counsel and advisors on any matters. The views presented are those of the author and not any other individual or organization. The information provided is for general educational purposes only and is not investment advice. The author of this material makes no guarantees or warranties about the accuracy or completeness of the information. Any action taken based on the information discussed should be reviewed with a professional. The author is not liable for any loss from acting on the information discussed.