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British crypto startup Copper is working on a fundraise of up to $500 million, according to three people familiar with the matter.

The investment will value Copper at more than $1 billion, vaulting it to unicorn status — a term reserved for privately-held tech startups with valuations upwards of a billion dollars. It is not yet clear exactly what the valuation will be. 

The company is expected to announce the fundraise before the end of the year, but the round has not yet closed, nor has a lead investor been earmarked, according to sources.

Copper has already raised $75 million through an extended Series B round earlier this year. The first $50 million tranche of that transaction came in May and was led by Dawn Capital and Target Global, with participation from Illuminate Financial Management. British billionaire and former Brevan Howard CEO Alan Howard then invested another $25 million in the business in June.

Aside from fundraising, Copper recently announced the appointment of former Chancellor of the Exchequer Philip Hammond as a senior advisor to the business. The Conservative Party politician — who served as Chancellor from 2016 to 2019 — will provide strategic advice to the startup as it expands internationally, as well as promote the United Kingdom as a digital assets hub.

In a recent interview with The Block, Hammond said that the dialogue among U.K. policymakers needs to shift “from talking about digital assets to implementing a legal framework that enables firms to embrace them.”

Founded in 2018, Copper uses multi-party computation (MPC), an emerging cryptographic method for securing private keys, to help guard crypto holdings against cybercrime.

Copper’s signature product, ClearLoop, is a system that connects cryptocurrency exchanges together in to enable instant, offline trade settlements. The company also offers payment settlement and prime brokerage services.

© 2021 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

Back in 2015, the pharmaceutical executive and fraudster Martin Shkreli purchased the sole physical copy of “Once Upon a Time in Shaolin,” the seventh studio album by the Wu-Tang Clan.

When Shkreli was sent to prison in 2018, the album was seized by the federal government, which held onto it until earlier this year. It was sold in July to an unknown party for an undisclosed amount.

The New York Times reported Wednesday that the mysterious buyer was PleasrDAO, the investment collective that’s spent the past year buying up multimillion-dollar non-fungible tokens (NFTs). The sale price was $4 million.

It makes sense, in a way. NFTs are one-of-one cryptocurrencies attached to media files. Proponents say they encourage a new sort of economic framework for digital art, based around patronage: if an NFT purchase funds an album or artwork, the work can still exist online, for free, while the artist gets paid.

It’s the inverse of the Wu-Tang model, where a single purchaser was able to effectively keep the music from the rest of the world. This was part of the concept behind the album – the initial sale contract prevented the buyer from releasing the music commercially for 88 years.

Though the general public has still never heard “Once Upon a Time in Shaolin,” PleasrDAO member Jamis Johnson has described the album as a sort of “O.G. NFT.”

DAOmentum

DAO stands for “decentralized autonomous organization” – a kind of investment group built around shared ownership of a cryptocurrency. Think corporations, without the actual incorporation.

CoinDesk has also learned that an agency called 6, which works with clients in the NFT space, brokered the deal between the PleasrDAO and the U.S. government.

6 co-founder Jesse Grushack told CoinDesk in an interview that he and his partners brought the idea to PleasrDAO earlier this year.

“The U.S. government was very clear that they needed to get rid of this to basically pay back the debts that Martin had accrued, and had been legally liable for,” Grushack said. “They didn’t want this deal to become like a public auction or anything, they just wanted it to be like a closed-door thing.”

Ultimately, it’s up to PleasrDAO to decide whether or not they want to keep the music under wraps. Because the album can’t legally have a commercial release, the DAO may decide to get creative.

“We believe that we can do something with this piece,” Johnson told the Times, “to enable it to be shared and ideally owned in part by fans and anyone in the world.”

“Theoretically, they could have 5,000 owners of the album and make a private listening party for those owners,” said Grushack, nodding to the concept of fractionalized NFTs (something PleasrDAO has played around with before). “I think it’s gonna be up to them to figure out the way to bring this back to the people.”

Trading for the first bitcoin futures exchange-traded fund (ETF) approved by the Securities and Exchange Commission (SEC) began this week for U.S. investors, and the cryptocurrency market appears to be rallying around its launch. The ProShares Bitcoin Strategy ETF (BITO) was the first to list on the New York Stock Exchange, with trading starting on Tuesday.

However, it’s vital to note what the approved ETF actually looks like and how much potential demand there might be for these products. One way to gauge interest is to see how other ETFs around the world have performed and what investors are actually looking for in a bitcoin investment vehicle.

This article is part of Crypto 2022: Policy Week, a look at how regulators and legislators are shaping cryptocurrency and how the industry is fighting back.

The SEC-approved bitcoin ETF is a futures-based trading products and does not hold any of the underlying crypto assets. A futures-based ETF tracks a derivative of bitcoin, rather than the actual asset. According to CoinDesk Learn, “Bitcoin futures may diverge from the spot price of bitcoin due to the prevailing market sentiment, so bitcoin futures ETFs might also occasionally track the price of bitcoin inaccurately.”

In contrast, spot-based ETFs hold the underlying asset and give investors direct exposure to the price movements of bitcoin. However, these investment products have been repeatedly rejected by the SEC.

Read more: What Is a Bitcoin Futures ETF?

Looking north: ETFs in Canada

As Americans attempt to understand the effects of the futures ETF, there is no better place to look than Canada for contrast. The upstairs neighbor has several crypto-focused ETFs trading on the Toronto Stock Exchange with billions of dollars in assets under management. 3iQ Coinshares, Purpose Bitcoin and CI Galaxy Bitcoin are three of the largest funds; Purpose is the largest with $1.2 billion (CAD $1.64 billion) in assets under management (AUM) as of Oct. 13.

More importantly, the top three ETFs by AUM are all directly invested in spot bitcoin with the futures-based alternative drawing in only $7.6 million (CAD $10.48 million) AUM or about 0.3% of Canadian ETFs, providing insight to the preference of investors.

An interesting fact comes to bear if we look at the holders of the Purpose and CI Galaxy ETFs. According to FactSet, the Purpose Bitcoin ETF is held by “unknown entities” while ~28% of CI Galaxy ETF holders are institutions, namely Bain Capital Public Equity and CI Investments.

This likely means the holders of Purpose are individual investors or smaller investment advisors, which aligns with the ethos of the requisite parties. CI GAM and Galaxy’s focus is on institutions, while Purpose Investments markets itself as an innovative consumer financial services company. With that, given the growth of crypto has been largely retail-driven, it might be unsurprising that Purpose’s ETF has more than three times the AUM of CI Galaxy’s.

What’s more, Purpose Investments recently announced that it has applied for three more crypto-focused ETFs along with a privately offered fund offering exposure to decentralized finance.

Spot ETFs favored globally

Investors around the world, including in Germany and Switzerland, are flocking to physically backed exchange-traded products (ETPs). The 21Shares bitcoin ETP, which is 100% exposed to spot BTC, is listed on both the Swiss Exchange and several German exchanges and is nearing half a billion dollars in AUM. Much like the Canadian ETFs, 21shares ETP has 100% exposure to single asset bitcoin and has significantly more demand than their crypto indexes and multi-asset counterparts, of which the largest has $215 million in AUM.

One of the newer entrants to the bitcoin ETF world, Brazil, also went with the spot based option. QR Capital’s bitcoin ETF is trading on the São Paulo exchange and holds 100% BTC with $41 million (BRL $227.5 million) in AUM.

Why do investors prefer physically backed or spot bitcoin ETFs?

According to Bitwise CIO Matt Hougan, futures ETFs could cost an additional 5% to 10% per year to roll into new futures contracts at each expiry alongside another 1% to 2% in fees. Furthermore, futures ETFs are only 85% exposed to the underlying asset, with the remaining 15% being invested in other asset classes.

Spot ETFs track the price of the underlying asset much more closely than their futures-based counterparts for less of a cost, making the product more attractive to investors who want direct exposure to bitcoin without custody risk. For example, according to Bloomberg, Horizon’s Front Month Rolling Bitcoin Index has returned 530% over the past two years, while bitcoin itself returned 660% over the same period.

If we look at price correlation of bitcoin, a bitcoin spot ETF (Purpose) and a bitcoin futures ETF (Horizon Betapro), we see that the futures ETF does an adequate job of tracking the price of bitcoin. However, the spot ETF maintains slightly closer price correlation.

Given the cost of maintaining a spot ETF is lower than maintaining a futures ETF, it follows that a spot ETF would be a better option strictly for tracking the price of bitcoin. Note that the correlation chart included considers the direct price correlation rather than a correlation on returns to showcase how well the ETFs track bitcoin on a dollar basis, as we are not looking cross-asset.

Why is the SEC adamant on approving a less favorable alternative?

The chairman of the SEC has been outspoken about investor protection and the oversight that comes alongside futures markets and other derivatives. Gensler deemed the spot bitcoin market susceptible to manipulation and an illegitimate source for an exchange-traded product. However, Bitwise argues the regulated CME bitcoin market is now the leader in price discovery, making it a viable option for spot-based ETFs.

The addition of any bitcoin ETF was a long time coming in the United States, but hopeful ETF providers have had even less luck in other countries, with France and Australia just beginning to offer “crypto-focused” equity funds. Holding stock in mining companies or in crypto-invested strategic companies like MicroStrategy has been a loophole for investors to gain exposure to the growth of the crypto industry. The United States’ recent decision may pave the way for regulation worldwide, considering its sheer dominance throughout other ETF markets.

While futures-based ETFs are not investors’ first choice, the combination of crypto and ETFs could make a big splash, introducing a new class of investor to both sectors. Consider that the global ETF industry currently has $9.4 trillion in assets under management, growing at an annual rate of 26%, while crypto’s market capitalization sits at $2.75 trillion – and most of its value is being held on retail exchanges, in trusts like Grayscale (a CoinDesk sister company) or on-chain where it can be used as intended. The U.S. represents $5.47 trillion in ETF AUM, or 70% of the overall market, signaling its adoption of crypto ETFs could be unprecedented.

Sufficient demand for the futures product could also lead to an influx of capital to ETF markets and increase buying pressure on BTC. If the first day of trading was any indication, the U.S. market has clearly been waiting for easier access to bitcoin. ProShares’ BITO ETF did over $1 billion in volume, the second highest of any ETF at launch.

Furthermore, the launch of futures-based ETFs may be a stepping stone to the maturity of bitcoin trading markets and the eventual listing of a spot-based product. If the SEC agrees with Bitwise, that the regulated CME market is responsible for price discovery, a wave of true spot ETFs might not be far off.

How long does a layer 2 remain a layer 2?

A new report released on Wednesday from blockchain development platform Alchemy shows that the number of apps on self-described Ethereum layer 2 Polygon is growing at a rapid rate, and that the ecosystem is increasingly becoming independent from projects on the Ethereum base layer.

According to the report, there are now 3,000 apps on the chain, up from just 30 last year. Additionally, Alchemy has seen a 145% increase in the number of teams building on the chain month-over-month.

Per Alchemy product manager Mike Garland, it’s growing “2x faster than Ethereum did at this point in its life lifecycle.”

While Polygon is often referred to as a sidechain and developers are working to position it as a complement to Ethereum rather than a competitor, the data also shows that the number of new Polygon-native apps is outstripping the number of apps deployed to both chains – possibly a sign of growing independence.

Of the new apps deployed to Polygon, only 38% are being built on both Polygon and Ethereum, versus 62% deployed exclusively on Polygon, per the report.

Garland said that the data shows how projects that are ETH-native but also deploy to Polygon are growing in tandem with fully MATIC-native projects.

“I think the most interesting thing to me about this data is that we’re seeing both developing in parallel (roughly 4/10 using Polygon alongside Eth, 6/10 using just Polygon). There are certainly many teams that are launching and growing natively on Polygon, but also a substantial group using Polygon to deepen what they started in the Ethereum ecosystem and enable new use cases,” he said.

MATIC is up 3.86% on the day to $1.54, and ETH has risen 8.35% to $4,105 over the same period.

Crypto miners, whose shares are most levered to bitcoin prices, surged on Wednesday after the price of the largest cryptocurrency hit an all-time high, trading above $66,000 for the first time.

Canada-based bitcoin miner Hive Blockchain Technologies (HIVE), which mines in regions with cooler temperatures and uses low-cost renewable energy for its operations, was the best performer among mining stocks, rising more than 7%. Fellow miners Hut 8 Mining (HUT) and Riot Blockchain (RIOT) both saw their shares advance more than 3%, while Marathon Digital (MARA) climbed slightly.

Stronghold Digital (SDIG), a bitcoin miner billing itself as an environmentally beneficial operator with access to cheap power, was up more than 60% from its initial public offering (IPO) price in its debut on Wednesday.

Among other crypto-related stocks, MicroStrategy (MSTR), often seen as a proxy for bitcoin because it holds so much of the digital currency on its balance sheet, climbed 5.8%, while crypto exchange Coinbase Global (COIN) gained 2.8% and Robinhood Markets (HOOD) where many users trade crypto, fell slightly. The wider S&P 500 index and the Nasdaq composite were also in the green on Wednesday.

The share prices of crypto miners, which derive most of their revenue from mining digital currencies and tend to hold as many of the minted digital coins as possible on their balance sheets, are highly correlated with the price of bitcoin. In fact, according to Wall Street firm D.A. Davidson analyst Christopher Brendler, mining stocks are about 70% correlated to the price of bitcoin.

Recently, Brendler initiated research coverage on bitcoin miners with a bullish outlook for the sector and named Hut 8 his top pick. “Although Hut 8 isn’t yet as scaled, we see the most earnings upside in the group thanks to a brand new, low-cost 100 MW facility (with 35 MW set to come online 4Q21 and the rest in 2022). Combined with well-timing mining rig orders to fill up this new data center and the cheap valuation, Hut is our top pick here,” Brendler said.

Miners versus bitcoin itself

With more institutional investors coming into the sector and bitcoin’s continued rally, the natural question is “why buy the miners when you can buy the cryptocurrency itself?”

Jefferies analyst Jonathan Petersen answered the question in his Oct. 18 research report. “It’s a fair question, but upon exploration of the topic, we have observed that mining generally results in higher returns on multi-year periods of time,” Petersen wrote. His analysis showed that if someone bought a more recent mining computer, S19 Pro, at the end of 1Q20, when the market spot price for the machine was $2,410, a mine-and-hold strategy would return 1,083% vs buying and holding bitcoin, which would return 764%.

On top of that, if a miner has access to cheap power, the returns are even greater, he added.

Bitcoin’s (BTC) price made a fresh all-time high above $66,000 on Wednesday and could continue higher as bullish momentum improves, price-chart indicators suggest.

A successful breakout would require a daily close above $65,000, which would yield upside targets toward $74,000 and $86,000.

The price of the world’s largest cryptocurrency by market capitalization has fully recovered from a near 50% correction earlier this year, which stabilized around the $30,000 support level. Since then, buyers responded to oversold conditions and continued to accumulate long positions anticipating the stock’s value will rise over time.

The next level of resistance is seen around $74,000, which could briefly stall the current rally. However, buyers will likely remain active above the $60,000-$65,000 support range given positive momentum signals on the weekly chart.

If support is held, BTC could see further upside toward $86,000, which is based on a measured move from the Oct. 1 breakout above the 200-day moving average.

The relative strength index (RSI) on the daily chart is the most overbought since February (current reading around 78), which preceded a brief price pullback. However, at that point, BTC continued to rally about 10% before hitting the April all-time high of $64,899, after which upside momentum slowed.

BTC will need to see continued buying pressure and a daily RSI reading above 50-60 to keep the current rally intact.

Since at least 2013, when the Winklevoss twins first filed an application to create one, a bitcoin exchange-traded fund (ETF) has been the crypto industry’s white whale. An ETF would open bitcoin investment to a huge new array of players, from individual 401(k) users to major institutions, who can’t buy bitcoin directly for regulatory or compliance reasons. Yesterday, we finally got a bitcoin ETF … sort of.

This article is excerpted from The Node, CoinDesk’s daily roundup of the most pivotal stories in blockchain and crypto news. You can subscribe to get the full newsletter here.

The ProShares Bitcoin Strategy ETF (BITO) is now trading on the New York Stock Exchange, and ProShares execs even rang the opening bell. They did it under a banner celebrating the first “U.S. Bitcoin-Linked ETF,” and therein lies a teachable moment for careful investors: “linked” is the kind of word that’s as fungible as a good currency, able to step in and do the work of dozens of lesser, more specific words.

In this case, the word being replaced is “futures” because rather than a fund that actually holds bitcoin the ProShares ETF will hold bitcoin futures contracts.

There’s huge irony to a futures ETF getting approved before a “real” bitcoin ETF. Regulators have broadly argued a futures ETF is less exposed to potential manipulation and custody risk in the bitcoin spot market – but the upshot could be massively missing gains for investors who buy the futures ETF instead of spot bitcoin.

The culprit is an issue known (for some reason) as “contango.” Investors in other commodities futures ETFs have been complaining about it for years, so we have a pretty good sense of how it works. I won’t get into the nitty-gritty here but the nut of it is that futures ETFs have to renew, or “roll,” their forward contracts regularly. If the longer futures price is higher than the expiring contract on the date of renewal, the fund loses that much basis. This loss is known as “contango bleed.” Here’s our deeper dive into contango risk, and an even deeper one from CenterPoint Securities.

(There is also an inverse phenomenon called “backwardation,” when the longer futures price is lower – but this seems less significant because it just gives futures ETF holders a small premium when the underlying commodity is already heading downward.)

These contango losses can be immense in conventional commodities, and may be truly gargantuan for bitcoin. In one snapshot noted by Motley Fool, a futures-based natural gas ETF stood to lose 1.5% on a single month’s roll. In larger markets, these spreads are often arbitraged out – professional traders can use them to make money and, in doing so, close the gaps. But as laid out by Bloomberg, crypto’s dominance by retail traders makes that arbitrage less robust. The current roll cost on BTC futures is a disemboweling 17%, according to Charlie Morris of ByteTree Asset Management. He expects the ETF to underperform spot longer term by 8.4% annually, before fees.

That sounds a lot like paying a jaguar good money to rip your face off. Tyrone Ross, a crypto-focused financial advisor, says retail investors should stay away from BITO.

Simeon Hyman, a strategist at ProShares, pushed back against Morris’s analysis yesterday on CoinDesk’s “All About Bitcoin’’. Hyman instead estimates an annualized 2.5% roll cost, and rightly points out that an expanding market could shrink the bleeding further. In any conventional asset, that would still be pretty brutal, but the expectation of continued upward movement for bitcoin could still make it worth it. Investors are certainly not being put off, with BITO attracting $570 million in inflows and a record-setting $1 billion in trading volume on day 1.

According to our reporting, that inflow seems to be substantially from retail investors. While some may be wise to contango risk, I guarantee many don’t even grok the difference between a futures and spot ETF. If they only notice the distinction after five or 10 years of contango bleed, there will be some truly biblical wailing and gnashing of teeth. Whether Morris’s or Hyman’s estimate is more on target, BITO will bleed buckets over a longer timeline.

I am not one of the single-minded trolls who think all regulation simply distorts markets, but it’s hard not to see some seriously perverse dynamics embodied in what regulators have brought to fruition here.

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VanEck will likely follow ProShares as the second issuer to list a bitcoin futures-based exchange-traded fund (ETF), according to a new filing with the Securities and Exchange Commission (SEC).

The issuer filed a post-effective amendment today proposing to list its Bitcoin Strategy ETF on Cboe BZX Exchange with an effective registration date of October 23. This means the offering would list “as soon as practicable” after becoming effective on the 23rd, according to the filing. It plans to list under the ticker $XBTF. 

The lead-up to the ProShares approval saw a similar process, in which the issuer filed a post-effective amendment prospectus stating its intention to list on Oct. 18. An October 18 document then stated the fund would list the following day.  

Like ProShares, VanEck’s fund will invest in bitcoin futures traded on exchanges registered with the Commodity Futures Trading Commission (CFTC). 

ProShares’ opening day on the New York Stock Exchange saw considerable success. Volumes neared $1 billion on the inaugural day, with most of the action seeming to come from retail trades. 

VanEck may have gotten an unofficial nod to move ahead with its futures product, but it’s still waiting for the SEC to follow up on its spot submission. It is the furthest along in the application cycle for a spot bitcoin ETF, though the SEC continued to punt its decision down the line. It’s now expecting an answer on its offering November 14. 

© 2021 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

Stronghold Digital, the bitcoin mining company that converts coal waste into power for its operations, surged in its first day of trading on Wednesday after raising $127 million in its initial public offering (IPO).

The Kennerdell, Pennsylvania-based miner’s IPO was upsized to $19 per share, after previously pricing its IPO at the range of $16 to $18 a share. The shares opened up 42% at $27 on Nasdaq under the ticker “SDIG.” They were recently trading up 65% to $31.37.

Stronghold converts “coal refuse,” a material left over from coal mining, into power used to mine bitcoin at its wholly owned Scrubgrass power plant in Pennsylvania. The company is led by Greg Beard, who is the co-chairman and CEO, and Bill Spence, who is also the co-chairman of the company.

Beard was previously a senior partner and head of natural resources at private equity firm Apollo Global Management. Spence, on the other hand, brings in 40 years of energy-related experience, and formerly owned and operated Coal Valley/Dark Diamond, a coal refuse power generation facility, from 1993 to 2007.

Environmentally beneficial operations

With conversation focused around crypto miners’ ability to use more environmentally friendly power sources, Stronghold is billing its ability to turn coal waste into bitcoin power as an advantage over its peers. “We are committed to generating our energy and managing our assets sustainably, and we believe that we are one of the first vertically integrated crypto asset mining companies with a focus on environmentally beneficial operations,” the company said in its S1 filing.

The miner is essentially taking an age-old traditional mining problem and turning it into a more environmentally friendly business model of the future by mining bitcoin. “Simply put, we employ 21st century crypto mining techniques to remediate the impacts of 19th and 20th century coal mining in some of the most environmentally neglected regions of the United States,” the company said in the filing.

Moreover, Stronghold’s reclamation efforts allow the company to earn tax credits in the form of Coal Refuse Energy and Reclamation Tax Credits, as well as Pennsylvania Tier II Alternative Credits, according to the company’s website.

Lower-cost operations

Stronghold calls itself a “vertically integrated” miner, as its mining rigs are powered by its own power plant, enabling the company to mine bitcoin at a lower cost than its rivals. “Owning our own source of power helps us to produce Bitcoin at one of the lowest prices among our publicly traded peers,” the company said in its filing.

For crypto miners, the biggest operating expense is the cost of power, according to a research note by Jefferies’ analyst Jonathan Petersen. “This is why professional BTC miners spend considerable effort finding locations with the lowest power rates,’’ he wrote.

The net cost of power for Stronghold is about $18 per megawatt-hour (MWh) at its Scrubgrass plant, which is lower than for most other crypto mining companies, according to the company’s data. This helps the company to be profitable when the price of bitcoin is above $3,000, according to a statement Stronghold emailed to CoinDesk. Currently the cryptocurrency is trading at all-time-high of more than $65,000.

“Given that the price of electricity has a significant impact on the ultimate economics and profitability of crypto asset mining, we believe long-term value is enabled primarily by the reduction of power costs and securing environmentally beneficial power generation assets,” Stronghold said in its filing.

Growth strategy

The company plans to grow by acquiring additional environmentally beneficial power generation assets and miners. It is currently in the process of closing on two coal refuse power-generation facilities deals, and intends to use the proceeds of the IPO for acquisitions, according to its filings.

The miner currently operates 3,000 miners with a hashrate capacity of about 185 petahash per second (PH/s). It plans to bring its total hashrate capacity to more than 2,100 PH/s by December and to more than 8,000 PH/s by December 2022.

Stronghold has entered the public market at a very opportune time, as cryptocurrency mining has been very profitable amid the continued rally in the price of bitcoin. In a recent research report, Wall Street firm D.A. Davidson said that the miners are “literally printing money” in the current market.

Every organization, of any kind, is organized in some way. So-called decentralized autonomous organizations (DAOs) are a new and different kind of organization: a collaboration among people in which members’ ownership, management and control are automated based on software.

Corporations are organized under the laws of a specific jurisdiction and require human involvement in their governance. DAOs, however, operate under a transparent set of software protocols – a pre-agreed set of governance rules, maintained and executed on a blockchain – that allow a distributed group of individuals or entities to self-govern. As a result, a DAO can function on a distributed basis with no central authority or decision maker.

Jason Gottlieb and Daniel Isaacs are partners, and Alexandra Wang an associate, at Morrison Cohen LLP, a law firm that compiles information on legal developments affecting DAOs and the blockchain sector. This op-ed is part of CoinDesk’s “Policy Week,” a forum for discussing how regulators are reckoning with crypto (and vice versa).

While the law has long imposed the useful fiction of personhood on corporations – allowing them to sue or be sued, enter contracts and offer its members protection against liability – DAOs do not yet enjoy these privileges (for the most part). The clash between the growing popularity of DAOs on the one hand and the lack of legal protections and practicalities available to them on the other present DAOs, their lawyers and the courts with a host of execution and analytical challenges.

It will be vital to address how DAOs can participate in traditional commercial arrangements, hire service providers, resolve disputes, utilize U.S. courts to enforce their rights, defend against lawsuits, limit the liability of their members and partition assets, among other legal issues.

This article addresses two practical problems that DAOs face: how a DAO can enter a commercial contract, and how a DAO can engage and direct legal counsel to assist it in doing so.

Legal recognition

Without formal legal recognition, a DAO lacks a legal form with which to enter a contract like a traditional commercial enterprise. While a DAO may pass a governance proposal authorizing an individual to enter into a commercial arrangement on the DAO’s behalf (and concomitantly funding that arrangement), the representative appointed by the DAO might not automatically enjoy the limited liability that a corporate officer does.

There is a risk the DAO could be considered a general partnership or unincorporated association. This might expose its members to personal liability for any of the DAO’s actions and obligations, and discourage businesses, institutional investors, or other vulnerable or regulated entities from participating in DAOs.

Members of the DAO may also be unwilling to undertake responsibility to contract on behalf of the DAO for fear the law would impose fiduciary duties upon them or that their own assets would be put at risk.

One solution is for the DAO to authorize, through a formal governance vote, an individual or a group of individuals to create and capitalize a traditional corporate entity for the limited purpose of entering a corporate arrangement on behalf of the DAO.

Nevertheless, using such a “bridge entity” is inefficient, cumbersome and sacrifices many of the key benefits that make DAOs special. Instead, DAOs should, like other types of business associations, be free to enter into a contract directly, either through delegated authority or by passing a formal proposal. To the extent applicable state law would not permit a DAO to enter a traditional commercial arrangement without sacrificing its members’ personal liability, the law should be updated.

A few states have already begun to do so. Vermont, for instance, permits DAOs to register as blockchain-based limited liability companies. Wyoming, too, recently passed legislation providing liability protection for DAO members who organize as a limited liability company in the state.

We believe these trends will attract business and promote positive business policy, and additional states should follow suit to eliminate the uncertainties of contracting as a DAO.

For lawyers

The retention of, and relationship with, legal counsel also presents serious challenges for a DAO. For instance, while a DAO may pass a governance proposal to engage its selected lawyers, the DAO must be able to effectively and nimbly direct its counsel on a day-to-day basis, receive reports from legal counsel and preserve the confidentiality and privilege of attorney-client communications.

The solution here is likely delegation. In our experience, the most successful relationships between DAOs and their counsel are structured arrangements whereby the DAO passes a proposal to retain its chosen counsel, and delegates a scope of decision-making, reporting and communicative responsibility to a particular member or group of members.

In such circumstances, though, special attention must be paid by the DAO, its legal delegates and its counsel to protect the confidentiality and privilege of attorney-client communications (concerns that are a topic worthy of their own article).

See also: The Novel Legal Strategy Bringing This ICO-Backed ‘Micro-Mobility’ Startup to Court

A DAO is, like other entities, a useful tool to allow a widely dispersed and multi-jurisdictional group of individuals to privately and efficiently order their business arrangements. While blockchain-based governance is rapidly expanding, the law has been slower to catch up.

This should not discourage DAOs from participating in traditional commercial arrangements, exercising a right to legal counsel, utilizing U.S. courts and enjoying access to a variety of otherwise readily available financial and business resources. Through consultation with experienced counsel, DAOs can work within existing legal frameworks, while preserving their innovative technological solutions, and adapt to changing legislation or regulations.

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