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Decentralised Protocols: Legal and Governance Questions
Explore how legal entities, directors and community voting interact in decentralised protocols, with practical questions for Cayman foundations.
April 12, 2024
Decentralised protocols combine software, economic incentives and governance arrangements. A community vote or smart-contract execution does not, by itself, determine who can enter a contract, employ a developer or take responsibility for an off-chain obligation.
Map the legal and technical responsibilities
Identify the protocol's decision-makers, treasury controls, administrator keys, service providers and entities holding intellectual property. Determine which actions occur automatically and which depend on individuals or organisations. The description 'decentralised' should reflect the actual arrangements rather than replace an assessment of control.
Where a Cayman foundation may fit
A foundation company can provide a legal entity for specified activities such as entering agreements, supporting development or administering grants. Its constitution and governance documents should explain the relationship between community proposals, board decisions and the foundation's objectives.
Directors remain responsible for their legal duties. A proposal passed by token holders does not automatically authorise the board to act unlawfully or outside the foundation's powers. Define how conflicting instructions, emergencies, sanctions concerns and disputed votes will be handled.
Design for continuing oversight
- Clear authority for treasury movements and contract execution.
- Controls over privileged keys and changes to software.
- Conflicts policies for developers, delegates and service providers.
- Records connecting proposals to decisions and implementation.
- Reporting and escalation for incidents or failed transactions.
Regulatory classification should address the activities undertaken by each participant, including any token issuance or virtual asset services. A foundation is a structuring option, not a universal exemption from financial regulation.
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