Turning the Swiss Association into a DAO: An Alternative to Foundations?
Many crypto projects have set up Swiss Foundations, including Ethereum itself. Many have come to rue it: the governance restrictions, local requirements and overall expense may not outweigh the perceived prestige.
In this piece, we examine if the Swiss Verein (Association) could be a viable alternative for those blockchain projects that need a non-profit, transparent and decentralized entity to further their goals.
As part of our analysis, we share and briefly examine the Articles of the Libra (now Diem) Association, and analyze and comment on the Model Articles and smart contract code proposed by Swiss legal and blockchain practitioners.
What is a Swiss Verein?
A Swiss association ("Verein" in German, "association" in French, "associazione" in Italian) is a legal structure in Swiss law, similar to the Anglo-American voluntary association - better known as a “club”.
Associations have separate legal personality, just like companies or foundations. In addition, unlike in Germany, as long as the Association is non-profit, there is no filing requirement in Switzerland (though an Association must be registered if it conducts a commercial operation).
In practice, this means it can be willed into life via a simple written agreement, which in our analysis includes a smart contract.
Its Members can be individuals or legal entities, and their liability as Members is limited.
Its pursuit has to be “non-economic” (see below), which traditionally has made the Association the entity of choice for non-profit organizations (NPOs) or non-governmental organizations (NGOs) such as Amnesty International and the World Wildlife Fund, or international organizations such as FIFA, the International Football Association.
However it has also emerged as the entity of choice for business organizations, such as legal services firms (e.g. Baker & MacKenzie, DLA Piper, Norton Rose, Denton) which consist of a number of independent offices, each of which has limited liability vis-à-vis the others.
This way, they can operate globally under one brand whilst maintaining separate profit pools and ring-fencing liability in each country in which they operate. Doing so does not bring the Members themselves within Swiss regulations: since control of the Association is decentralized, Members are only bound by regulators in their country.
It is a setup reminiscent of the Articles of Confederation - separate economies, regional constituencies, decentralized decision making - which is now widely adopted by international businesses.
The Centralized Association: Diem
A more recent use case for the Swiss Association was the Libra (now Diem) association.
Whilst by many considered a doomed project (or a lesson in how to spend millions in record time with little to show for!), its Statutes are quite enlightening in a number of aspects and - unsurprisingly - well drafted.
Apart from the usual clauses related to its purpose, how Members are admitted and suspended or terminated, Article 5.a of the Diem association requires each Member to:
install and maintain […] a validator node that participates in consensus for validating transactions and creating a ledger of transactions on the […] blockchain.
Such wording points at the potential for an Association to be the organization behind a decentralized blockchain in which each validator, either in individual capacity or as an entity, is a Member.
In the case of Diem, governance is predictably rather corporate, with the following bodies:
A General Assembly of Members called the “Council”, with a Chairperson and a Deputy Chair;
A Board of Directors;
A technical steering committee;
Auditors (only required if certain thresholds regarding balance sheet, revenue and full-time employees are exceeded).
With regards to the Board, in contrast with Swiss Foundations, Associations are not required to have a resident Board member and Directors can also be a legal entities rather than individuals.
This allows for much greater flexibility in how an Association can be managed, especially for those projects that are largely run outside of Switzerland.
For instance, the director of your association could be your operational entity which -depending on your use case - could be a Swiss company (as is the case of Diem) or a company based outside of Switzerland.
A second board member could then be elected from your membership base, to make sure Members have appropriate representation on your board.
An uneven number of Directors may be preferable (Diem has 9!), however in an even-number board one Board director, typically the President, could be given a casting vote to avoid impasses.
To make governance democratic, the Council should have the power to elect and revoke members of the Board, and each Member of the Council should be entitled to cast only one vote.
This is the case with Diem, which on the whole achieves a high degree of participation for its Members. However, there are more subtle mechanisms at work which we do not need to detail here that ensure the original sponsors of the Diem project - Facebook - hold the reins to the project.
Towards a Decentralized Autonomous Association
The Swiss legal services firm MME, which back in 2017 conducted many Initial Coin Offerings (ICOs) and set up Swiss Foundations as part the ICO process, recently issued Model Articles of Association for what it terms the “Decentralized Autonomous Association” (“DAA”), together with accompanying code by Validity Labs with the aim to smart-contractify part of the DAA’s governance.
Recognizing an Association’s overall flexibility and user-friendliness compared to a Swiss Foundation, the Model Articles seek to achieve the best of both worlds - a DAO with limited liability.
For this purpose, the MME Model Articles introduce two new bodies, in addition to the Assembly of Members and Board of Directors we’ve encountered in Diem’s setup:
A “Member Community”
Their governance logic then runs as follows:
The Assembly of Members would retain the core powers which are enshrined in Swiss law (such as the change of statutes, the liquidation of the association, and others). These powers protect the Members’ essential participation rights which cannot be structured away and on which an Association’s democratic nature is based.
As a result, the Assembly would be the “highest governing body” of the Association (Article 8 of the Model Articles).
As a result of the use of smart contracts (see below), most of the Assembly’s powers can be expressed as code:
Electing the Board Member called a “Delegate” (VoteForDelegate);
Discharging the Delegate (proposeDischarge & VoteForDischarge);
Changing the Articles of Association (SetHashOfStatutes & VoteForChange Statutes);
Deciding on updating the underlying code (ProposeUpdate & VoteForUpdate);
Dissolving the Association and using the proceeds (ProposeDissolution & VoteForDissolution);
Setting the amount of member contributions.
In addition to the list of powers above, Article 8 of the Model Articles provides fairly standard practices, borrowed from how companies are typically governed, dealing with how an Annual and Extraordinary Assembly can be called and conducted (Art. 8.4) and provisions related to Motions and Agenda Items (Art. 8.5).
Article 8.2 envisages resolutions be adopted with a simple majority of Members participating in the Assembly, with only some decisions (e.g. updates to the underlying code and the dissolution of the Association) requiring a majority of 2/3rds of the Members present.
Article 8.3. provides that any Member can propose herself/himself for candidacy as Delegate (proposeDelegateCandidancy) and any Assembly Member can vote for exactly one candidate (VoteForDelegate) or not vote at all.
The above may raise the question why a DOA still needs a Board.
The answer is that realistically, only very few DAOs will exist entirely as code: Most will still have the need to act in the real world and ultimately require actions which can only be performed by physical people.
Only some of the powers of the Board can be expressed as smart contract functions (Article 7 of the Model Articles):
Other Delegate duties are outside the smart contract code, e.g.:
Representing the Association to the outside world;
Keeping the books and creating the necessary financial statements;
Regulating signatory powers;
Appointing a Board of Advisors (if any)
Keeping the member registry (name, address, e-mail) together with the Association’s whitelisters.
The Model Articles provide that the term of office for the Delegate would start at the end of an Assembly and ends at the end of the next Assembly, so basically the appointment is for one year.
The smart contract also provides a step-DownAndProposeGA function in case the Delegate becomes unable to act or loses his/her private key. In such scenario, an extraordinary Assembly will be called and a new Delegate elected.
Finally, the Model Articles specify that the personal liability of the Delegate is limited to cases of gross negligence.
Overall, the Delegate’s powers are drastically limited compared to those of a Board member in a traditional setup such as Diem’s (above), presumably in an effort top reduce a potential single point of failure in what is meant to be a decentralized setup.
A “Member community”
Third, a newly introduced “Member Community” aims to lend further decentralized creds to the DAA.
Every Member of the Association is also a member of this Community, which has the specific power to submit new projects (submitProposal) and to vote on the allocation of funding to those projects (voteForProposal).
This is similar to the grant mechanisms of decentralized Foundations, and is based on onchain voting and Ethereum smart contracts.
As a result, the DAA Model Articles had to make such voting binding and “non-reversible”, not even by the Delegate or the Assembly.
Finally, the Member Community has also has the power to expel members from the Association.
All votes are to be onchain and by simple majority.
Finally, there is a “Whitelister” group with powers to review Member applicants on their eligibility to join the Association.
Under the Model Articles, the power to appoint and remove Whitelisters lies with the Delegate.
Similar to the rules of a gentleman's club, you can only become a Member if you have been recommended (whitelisted) by at least two other whitelisters.
Furthermore - just like your local yacht club or tennis association! - you will have to pay a membership fee to qualify as Member.
Finally, the Model Articles limit - rather incomprehensibly - the eligibility for Membership to natural persons, legal entities and organizations under public law that “have a residency in Switzerland” or “can provide proof of their travel to Switzerland within the last three months”, in case of a non-resident candidate Member.
The Swiss Association is a very attractive vehicle for decentralized projects.
Provided the articles are drafted inclusively, they provide a participation mechanism for geographically dispersed blockchain projects, with the Swiss structure providing a limited liability wrapper around a common goal.
This common goal can be political, scientific, artistic, religious or any other non-economic purpose.
If so, there is no need to register an Association in the Swiss registry of commerce. The only requirement is that prior to its establishment, two persons draw up bylaws and appoint the bodies of their Association.
Tax-wise, Swiss Associations with charitable or other public non-profit objectives may apply for an exemption from income and capital taxes under certain conditions.
Governance-wise too, an Association offers a very high degree of flexibility compared to a Swiss Foundation, and its formation as well as its governance should in theory be entirely smart-contractifiable.
However, we feel MME’s Model Articles analyzed above are an uneasy hybrid of onchain and offchain governance. Whilst laudable as an attempt to find a balance between the dynamics of a pure-sang DAO and a real-world legal entity, they remain a halfway house towards full decentralization and fall short of the promise of the DAO as an autonomous, unstoppable and radically decentralized organization.
This means that the quest for the Holy Grail of the right jurisdiction and legal wrapper for a DAO continues, even if the Swiss Association - when properly setup - comes close.
Perhaps the end point of this quest will be the realization that DAOs do not need legal wrappers and jurisdictional anchors, once we have found other ways of limiting the risks of going unincorporated.
DISCLAIMER: Not legal or tax advice.