Reports indicate that the number of DAOs increased from approximately 700 in May 2021 to about 6,000 in June 2022. This significant jump speaks to the increasing shift in what many consider the foundations of a business. The predominant question is not necessarily whether to start a DAO but where and how to do so.
The Cayman Islands are a popular destination for companies looking for business-friendly regulations. This is especially true for DAOs, or Decentralized Autonomous Organizations, which operate on a blockchain network using smart contracts.
According to David Lloyd, founder and managing director of Bell Rock Group, a regulated provider of professional services for the Cayman Islands Foundation Companies, “DAOs are unique in that they cannot necessarily be termed ‘companies’ in the traditional sense – instead, they are made up of a community, and based on transparency, decentralization, and autonomy which sets them apart from other traditional businesses.”
What is a Foundation Company?
The Cayman Islands Foundation Companies Act, 2017 is a piece of legislation that governs the formation and operation of foundation companies in the Cayman Islands. A foundation company is a legal entity similar to a traditional foundation, but it is incorporated as a company rather than unincorporated.
The act sets out the requirements for forming a foundation company, including the appointment of directors and the maintenance of records, as well as the powers and duties of the foundation company and its directors. It also provides for the regulation of foundation companies by the Cayman Islands Monetary Authority.
Foundation Companies have proven very popular for DAOs because they use blockchain technology.
The advantages of incorporating in the Cayman Islands
There are numerous reasons why incorporating DAOs in the Cayman Islands is so popular, including the following:
A legal system suited to corporations
Foundation companies incorporated in the Cayman Islands are ideal for decentralized autonomous organizations (DAOs) because the jurisdiction has a legal framework that is well-suited to the unique structure and operations of DAOs. The Cayman Islands has a flexible corporate law regime that allows for the creation of foundation companies, similar to non-profit organizations with no shareholders or owners.
Stability
The Cayman Islands is a British Overseas Territory with a stable political environment and a good reputation for being a business-friendly jurisdiction.
Tax Benefits
The Cayman Islands has no corporate income tax, capital gains tax, sales tax, or withholding tax, making it an attractive location for businesses that want to minimize their tax burden. The Cayman Islands has strict laws that protect the confidentiality of financial information, making it a popular location for companies that want to keep their financial information private.
Robust regulation
Additionally, the jurisdiction has a robust regulatory environment and is well-respected internationally, which helps to provide stability and credibility for DAOs incorporated there.
The Virtual Asset Service Providers Act (VASPA)
Finally, the Cayman Islands are especially popular for DAOs because of the Virtual Asset Service Providers Act. The Virtual Asset Service Providers Act (VASPA) is a law that regulates virtual asset service providers (VASPs) in the Cayman Islands. The act provides a regulatory framework for the registration and supervision of VASPs, intending to protect consumers and reduce the risk of money laundering and terrorist financing.
The VASPA requires VASPs to register with the Cayman Islands Monetary Authority (CIMA) and comply with the Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) regulations. The registration process includes providing CIMA with detailed information about the VASP’s business, AML/CFT policies and procedures, and undergoing an on-site inspection to ensure compliance.
VASPs must comply with ongoing compliance requirements such as maintaining records, filing annual returns, and appointing auditors. They also need to comply with the regulations for customer due diligence, suspicious transaction reporting, and record-keeping.
The VASPA also establishes a framework for the supervision and enforcement of the act by CIMA, which includes the power to impose fines and revoke licenses for non-compliance.
Choose the right firm to incorporate DAOs
Incorporating DAOs can be tricky because the concept of a decentralized autonomous organization is relatively new, and there still needs to be a clear legal framework for how it should be structured or regulated.
Additionally, because DAOs operate on a blockchain, there may be regulatory issues related to securities laws and compliance with laws related to money transmission.
For DAOs to avoid unnecessary problems, they need to have a legal personality who can interact with third parties, hold assets, enter into contracts, open accounts, and protect intellectual property, amongst others.
Final take
The Cayman Islands offers a combination of legal and regulatory stability, a tax-neutral environment, and a wide range of professional services, making it an attractive location for many businesses, and especially DAOs, due to the ability to form Foundation Companies which can be ownerless, just like the DAO it stands for.
In order to ensure that you get the right advice, contact a company that has the necessary experience and know-how of the issues surrounding DAOs, blockchain developments, and governance and regulation to provide services such as foundation formation, secretary, registered office, supervisor, and director services to Cayman Foundations.
