Summary

dYdX Foundation is introducing a framework for the creation of a Guernsey purpose trust (the “Purpose Trust”).1 This trust structure presents a potential solution for several issues decentralized autonomous organizations (“DAOs”) face by (1) limiting liability for DAO and DAO committee participants; (2) enabling DAOs to engage in off-chain activities; and (3) clarifying the existence, or lack thereof, of any United States tax payment and reporting obligations. Further, the creation of the Purpose Trust under Guernsey law specifically creates additional benefits that may not exist for trusts in other jurisdictions: flexible trust requirements and favorable rates of taxation.

The Purpose Trust was contemplated in the context of a DAO’s grants program but could be adopted by other subDAOs and potentially DAOs.

The Purpose Trust likely will be a suitable structure for funds transferred from DAO community treasuries that are earmarked for the given protocol’s growth and development. The goal of making this framework public is to provide DAOs with a starting point to evaluate the applicability of the Purpose Trust for their operations, allowing them to focus on building protocols and ecosystems rather than searching for an efficient operating structure. Although DAOs will still need assistance from legal counsel, this framework seeks to significantly reduce the time and cost associated with engaging legal counsel to evaluate the viability of a similar structure.

Introduction

As the use of DAOs has grown, efforts to enable DAOs to operate effectively have become a significant area of inquiry. The absence of comprehensive guidance has required DAOs to commit significant resources to ensure their operations are compliant with the rules of any number of jurisdictions. In particular, the U.S. has numerous existing laws that could be applicable to DAOs and a dearth of guidance specifically addressing critical issues faced by DAOs. Because of the minimal contacts necessary for U.S. regulatory agencies to potentially assert their authority over matters involving securities and taxation and for potential private litigation to create liability for DAO token holders, addressing U.S. law and tax concerns, or even structuring DAO operations within the U.S. to meet reporting obligations more easily, is a significant component of most analyses.2 As a result, exploring solutions for DAOs with a presence generally outside of the U.S. is often lost in the complexity regarding U.S. compliance issues.

This framework is contemplated for use under the following circumstances:

• DAO tokens govern a protocol with governance contracts that only token holders can change, which generally is true for DeFi protocols but may not be true for other protocols, including layer 1 blockchain networks.
• The Purpose Trust serves as a vehicle for a committee of a DAO or a subDAO focused on a particular task, such as making grants, and does not wrap the DAO.
• DAO token holders desire a compliant structure that does not require government approval for entity formation or for them to make ongoing filings or reporting obligations.
• DAO token holders desire a compliant structure that does not subject the Purpose Trust to unnecessary levels of taxation.

Although it is not contemplated in this framework, the framework could potentially be used as a wrapper around an entire DAO with some changes to the mechanics in the governing document.

Trust Structure

The Purpose Trust contemplated in this framework is formed under Guernsey law. Assets are transferred from a smart contract the DAO controls to the Purpose Trust and one or more trustees (the “Trustees”) and an enforcer (the “Enforcer”) enter into a written agreement, thereby bringing the Purpose Trust into existence.3

The Purpose Trust is governed through the Purpose Trust Instrument (the “Trust Agreement”), which establishes the relationship between the Trustees and the Enforcers with respect to the assets transferred to the Purpose Trust. The Trust Agreement specifies a purpose or purposes that the Trustees are obligated to fulfill for the Purpose Trust.

The Trustees are required to administer the Purpose Trust in accordance with the terms of the Trust Agreement and are subject to general fiduciary duties, including to always act honestly and in the best interests of the purposes of the Purpose Trust, to act as a prudent person of business and to act with reasonable skill and care. The Trustees may use funds transferred to the Purpose Trust for any transaction or arrangement that furthers the purpose of the Purpose Trust and transactions from the Purpose Trust can be executed using the multi-sig wallet to which the DAO transfers tokens. The Trustees are entitled to continue to receive compensation for their roles as Trustees, so long as the compensation is approved by the DAO token holders. The Trustees are always subject to removal by the other Trustees as directed by a vote of the DAO token holders. Specifically, the Trustees must (and can only) remove other Trustees at the request of the DAO token holders.

The Enforcer monitors the Trustees’ activities to ensure that the purpose of the Purpose Trust is carried out, similar to the role of a watchdog. The Enforcer can be provided with a broad range of rights. This framework contemplates the Enforcer having a right to disclosure of information from the Trustees, including in respect of distributions made and spending by the Trustees from the Purpose Trust, as well as to conflicts of interests of the Trustees that may have existed in connection with any of the Trustees’ actions. The Enforcer’s powers are fiduciary powers, which means they are required to periodically consider whether to exercise those powers and must exercise them consistent with the Trust Agreement and not capriciously, arbitrarily or in bad faith. The Enforcer is always subject to removal by the Trustees, who must (and can only) remove the Enforcer at the request of the DAO token holders.

If the DAO token holders want the assets in the Purpose Trust to be transferred to a different Purpose Trust or elsewhere, then, through a favorable vote of the DAO token holders, they can direct the Trustees to terminate the Purpose Trust and transfer the assets to that different Purpose Trust or elsewhere, with the Trustees being required to act in accordance with that direction. However, regardless of what the DAO token holders direct, Trustees may never transfer the Purpose Trust’s assets to the DAO or any DAO token holders.4 Aside from this right, the Purpose Trust is irrevocable. To address a situation where no determination is made with respect to the transfer of the Purpose Trust’s assets following its dissolution, the Trust Agreement could contemplate a transfer for a qualifying charity.

A Trust Agreement that has been contemplated for use in a DAO’s grants program is available here. It contains other mechanics to ensure both the efficient operation of the Purpose Trust and to minimize trust that DAO token holders put in the Trustees and Enforcer:

• The Trustees and Enforcer provide Twitter handles, email addresses and Ethereum addresses used for the multi-sig rather than requiring physical addresses.
• Ideally, the Trust Agreement to be entered into would be hosted on IPFS rather than on a private server and the Trustees and Enforcer would sign the Trust Agreement by signing an Ethereum message that references the Trust Agreement IPFS hash. However, Guernsey law does not allow a Trust Agreement to be signed electronically. Thus, the Trustees and the Enforcer must wet sign the Trust Agreement, and the signed Trust Agreement is uploaded to IPFS as the source of truth for the Trust Agreement.
• Trustees operate as they would generally if the Purpose Trust did not exist, which includes acting via real-time written communications, such as Signal, rather than requiring more standard meetings, and by funding grants through a multi-sig in the manner they would have without the Purpose Trust.
• DAO token holders take actions permitted under the Trust Agreement via Snapshot with reference to the then-current vote requirements for approving proposals using Snapshot and only the DAO token holders can modify these requirements.
• Governance could move to another chain and the Trust Agreement contemplates the continued power of DAO token holders to vote on the other chain.
• Trustees must take the following actions when the DAO token holders vote for them:
• ///-terminate the Purpose Trust;///
• ///-transfer the Purpose Trust’s assets upon the termination of the Purpose Trust where the DAO token holders direct them to be transferred, except that none of the Purpose Trust’s assets may be transferred to the DAO or the DAO token holders;///
• ///-compensate Trustees and Enforcer;///
• ///-add and remove a purpose from the Purpose Trust;///
• ///-change the jurisdiction of the law that applies to the Purpose Trust;///
• ///-appoint and remove Trustees and Enforcer; and///
• ///-amend the Trust Agreement with the agreement of the Trustees and Enforcer.///

Issues in DAOs

The Purpose Trust solves the main issues facing DAOs regarding entity structure: (1) limiting liability for DAO participants, (2) providing a legal form to engage in off-chain activity, and (3) clarifying existing tax obligations.

Limited Liability of Trustees and Impact on Token Holders

Significant uncertainty exists around the status of a DAO, including the potential liability of DAO token holders. That potential liability could include unlimited liability for a DAO token holder for that holder's own actions, for all DAO token holders for another holder’s actions, or for a subset of DAO token holders for actions of a holder that is part of that subset.

When the Purpose Trust replaces the function of a DAO committee or subDAO rather than a wrapper for the entire DAO, it alleviates the DAO token holders from taking actions that could result in liability for them. Since they do not act, any attempt to hold them liable would be for the actions of the Trustees, who are not part of the DAO. Thus, DAO token holders’ potential liability is significantly reduced.

Instead, the Purpose Trust requires the Trustees to act. So long as they act within the terms of the Purpose Trust, in accordance with their fiduciary duties and make clear to any third parties that they are acting in their capacity as Trustees of the Purpose Trust, the Trustees’ liability for their actions as Trustees is limited to the value of the Purpose Trust’s assets under their control. Thus, the Purpose Trust enables Trustees to take actions to fulfill the purpose of the Purpose Trust, without resulting in increased liability for the Trustees and with limited risk to DAO token holders. Moreover, the Trustees may be indemnified for actions they take as Trustees.

Off-Chain Activity by or for Benefit of Token Holders

An issue that has plagued DAOs has been their inability to act in the off-chain world, requiring DAOs to have (a) the initial development company sign agreements on its behalf, creating significant risk to the development company; (b) one DAO token holder signs agreements, creating significant risk to that DAO token holder and potentially all other holders; (c) the DAO signs agreements, essentially admitting the unlimited liability of the DAO token holders; or (d) the DAO has avoided interacting with the off-chain world. These options are sub-optimal.

The Purpose Trust solves the inability of DAOs to act in the off-chain world because Trustees can engage in the same type of activity as any other entity, meaning, among other things, they can open a bank account and sign agreements. Although the Purpose Trust is not a legal person, the Trustees hold its assets and act on its behalf in their capacities as Trustees. When the Trustees open a bank account, they are opening the account in the name of the Trustees on behalf of the Purpose Trust and subject to all the Trustees’ obligations under the Purpose Trust and so long as they do so in their capacities as Trustees, with the benefit of limited liability for the Trustees. The same is true when signing agreements. Therefore, all the off-chain restrictions that DAOs face traditionally no longer exist when operating with a Purpose Trust.

Clarifying Existing Tax Obligations

To date, there is minimal guidance directly applicable to issues that DAOs face, particularly regarding distributions of tokens they control. In the U.S., DAO token holders could be viewed as holding interests in pass through entities, resulting in taxable income to the DAO token holders in a variety of situations.5

Solutions that have been created to date have either perpetuated those risks or addressed them with significant tax leakage. For example, the UNA in the U.S. provides a vehicle for tax payments and compliance with reporting requirements, it is not a tax advantaged structure and is subject to a U.S. federal tax rate of 21% on taxable income.

When significant steps have been taken to eliminate, or significantly minimize, U.S. citizens' ownership of governance tokens and activity of the DAO in the U.S., opting into a structure that subjects the DAO to a 21% tax rate is not ideal. Instead, a structure that benefits from the non-U.S. nature of the DAO and those involved in the DAO is a more appropriate solution.6

As the Purpose Trust contemplated herein is established under Guernsey law and clearly meets the requirements to be treated as a foreign trust (as opposed to domestic) for purposes of U.S. taxation, the primary issue in identifying U.S. tax obligations is determined by whether the foreign Purpose Trust should be classified as a grantor or nongrantor trust. This issue is critical to the Purpose Trust and the DAO token holders because, in general, income from a foreign grantor trust is taxed to the trust’s grantor and not to the trust or the trust’s beneficiaries (in this case, the grantor would be the DAO token holders). Whereas, generally, a foreign nongrantor trust is taxed upon distributions to U.S. beneficiaries and, to the extent the trust retains U.S. sourced or effectively connected income, the trust itself is responsible for any U.S. tax obligations.

I.R.C. §§ 673-679 of the Internal Revenue Code contain various requirements for identifying when a grantor trust exists. The core issue is that if the grantor retains sufficient dominion and control over the assets of the trust, then it is appropriate to treat the grantor as the owner of the trust for U.S. federal income tax purposes. In contrast, there is no test for nongrantor trusts as any foreign trust that is not a grantor trust, is a nongrantor trust.

Although under this framework the DAO token holders do retain minimal rights regarding the assets transferred to the Purpose Trust, they do not have the right to revoke the Purpose Trust and distribute the assets back to the DAO or to themselves individually, substitute assets, take loans against the Purpose Trust’s assets, or direct payments to beneficiaries. In essence, the DAO token holders have retained sufficient control to ensure that the Trustees and Enforcer honor their fiduciary duties, but as the DAO token holders cannot direct the assets or make decisions regarding how they are utilized for the intended purpose of the Purpose Trust, it is the Purpose Trust itself that is exercising dominion and control over the Purpose Trust’s assets and should be the party responsible for any tax obligations.

The reason a Purpose Trust with these specific facts is expected to have no U.S. tax reporting or income filings is because the trust was not funded on a transfer involving a U.S. Person (as defined under Treas. Reg. § 1.679-1(c)(2)), there are no U.S. beneficiaries to the Purpose Trust and the Purpose Trust generates no U.S. sourced income.7

The Purpose Trust under Guernsey law with no Guernsey resident beneficiaries and no Guernsey source income, will not be subject to any taxation under Guernsey law but could still be subject to tax in other jurisdictions. In the event the Purpose Trust was to distribute funds to a U.S. beneficiary, or someone who could be deemed a U.S. beneficiary, for purposes of U.S. taxation, the Trustees would be obligated to provide a beneficiary statement for the beneficiary to pay taxes on the distribution.8 If the Purpose Trust earns U.S. source or effectively connected income, then the Purpose Trust would need to attain a U.S. tax identification number and the Trustees would need to file a Form 1040-NR to report and pay the taxes associated with that activity.

Issues Guernsey Solves

The Purpose Trust under Guernsey law creates additional benefits that may not exist for trusts in other jurisdictions: no taxable income for the Purpose Trust and flexible trust requirements.

Tax Obligations of Token Holders and Trustees

As discussed above, the Purpose Trust minimizes tax risk for DAO token holders and Trustees. Creating the Purpose Trust under Guernsey law has the added benefit of clarifying the tax obligations of the DAO token holders when tokens are transferred from or exchanged in the Purpose Trust. In the case of a DAO grants committee and some other committees or subDAOs, which transfer tokens on a regular basis, the transfers would be made subject to Guernsey Law and not subject to U.S. tax treatment. In addition, the Purpose Trust is not expected to have any tax filing or reporting obligations in Guernsey for that activity.

Flexible Trust Structure for Token Holders

The Purpose Trust under Guernsey law provides significant flexibility to create an arrangement that maximizes benefits to DAO token holders and participants in the Purpose Trust. In addition to flexibility in drafting documents, Guernsey laws are flexible in terms of who may serve as a Trustee and Enforcer in addition to the powers that can be reserved for third parties over the Trustees and Enforcer.

Other jurisdictions with favorable tax regimes, such as the Cayman Islands and the British Virgin Islands, have more rigidity. For example, both of those jurisdictions require that the Trustees include a licensed local trust company, which would mean that as a practical matter typical DAO committee members could not exclusively serve as Trustees and that the trust would be subject to government determinations regarding trust licensing. That same requirement does not apply in Guernsey (or Jersey).

DAO Status and Trust Requirements

In evaluating a desirable jurisdiction and entity type to serve as a committee of a DAO or a subDAO, maintaining the benefits of a DAO and limiting trust in anything other than code should be primary considerations. The Purpose Trust under Guernsey law allows a DAO to retain all the characteristics of a DAO and continue to minimize trust in any group or person.

DAO Benefits

One of the primary concerns with introducing a legal structure into a DAO is that observing corporate formalities designed for centralized and in-person organizational structures is that the benefits of decentralization and autonomous operations could be compromised. The benefits of not relying on a government for their existence, the lack of any central point of failure, efficient cooperation between participants, and active participation from a broader group can easily be lost when complying with obligations that have kept pace with technological advancement.

The Purpose Trust under Guernsey law eliminates certain issues that other proposed entity structures have historically faced. A key issue has been the need for an administrative body, such as a state government to allow the existence of the entity. The Purpose Trust under Guernsey law requires no such approval; instead, the Purpose Trust comes into existence the moment assets are transferred to it and Trustees and Enforcer execute the Trust Agreement.

The only government involvement that can exist with the Purpose Trust under Guernsey law is a Guernsey court deciding a matter applicable to it. This involvement is identical to the potential impact a court can have on a DAO. Only a court can end the existence, as a legal matter, of a DAO just as it may end the existence of the Purpose Trust.

Trust Minimization

The Purpose Trust under Guernsey law does not change the trust required in the holders of the multi-sig with all tokens transferred to it from the DAO but significantly alters legal rights to align them with the intention of most DAOs.

Historically, DAOs have transferred or streamed funds to multi-sigs for key holders to distribute them. In doing so, DAOs lose control over the use of the funds once they are transferred to the multi-sig. It is unclear what rights the DAO token holders retain to require funds to be returned to the DAO or to force key holders to be removed from the multi-sig or to have new ones added to it. Instead, DAO token holders are left trusting the key holders to do the right thing with funds transferred to the multi-sig controlled by the key holders.

When using the Purpose Trust under Guernsey law, DAO token holders retain many more rights that enhance the multi-sig arrangement. At a high level, DAO token holders retain the legal right to direct Trustees to remove Trustees, add Trustees, remove the Enforcer, add an Enforcer, or terminate the Purpose Trust and transfer funds wherever the DAO token holders determine (other than to the DAO or the DAO token holders). A Purpose Trust structure with the rights outlined above ensures that Trustees and Enforcer can always be held accountable. However, Trustees retain control over day-to-day decisions regarding the use of funds, including the transfer of all funds for a specific use consistent with the purpose of the Purpose Trust without DAO token holders having any right to direct those transfers.

Trustees

Current Risks to the Multi-Sig Key Holders

All holders of keys in a multi-sig are subject to a certain level of regulatory and private litigation risk. In addition, tax consequences related to their activity are unclear, and multi-sig holders have a limited ability to act effectively.

With respect to regulatory and private litigation risk, multi-sig key holders have no limited liability protection, meaning that they each may be personally liable for actions they take or, potentially, for the actions of other multi-sig key holders. That liability could arise in multiple ways, multi-sig key holders may become fiduciaries for the DAO token holders when they are transferred tokens to hold in a multi-sig, or they may face litigation from grants made depending on how relationships with grantees evolve, including decisions to stop funding a grant recipient for any reason.

With respect to tax matters, liability for the distribution of tokens out of a multi-sig that received funds from a DAO is uncertain. Holders of keys to a multi-sig could be viewed as holding interests in a pass-through entity, resulting in taxable income to the multi-sig key holders upon the transfer of tokens to recipients or the exchange of one token for another token. Thus, those transactions could create tax liability for multi-sig key holders. Multi-sig key holders also are limited in their effectiveness. Without creating additional risk for themselves, they cannot sign contracts or open bank accounts. This limits the ability of the multi-sig key holders to operate in the manner most effective to grow the protocol.

The risks and limitations set forth above are the same in all DAOs and anytime someone participates in a multi-sig in the way it has typically occurred in DAOs. However, the Purpose Trust provides an alternative that addresses these risks and limitations.

Benefits to the Multi-sig key holders

The Purpose Trust solves the risks and limitations of multi-sig key holders by (1) limiting liability for Trustees; (2) ensuring their tax compliance; and (3) enabling them to be more effective in off-chain activities.

Limited Liability

As noted above, the Purpose Trust requires the Trustees to act to fulfill the purpose or purposes of the Purpose Trust, and Trustees have limited liability for their actions as Trustees. Pursuant to the Trust Agreement provided as an example with this framework, no Trustee is liable for any loss to the Purpose Trust’s funds, whether because of the failure, depreciation or loss of any investments made or retained in good faith or by reason of any mistake or omission made in good faith or of anything else except for fraud, willful misconduct or gross negligence on the part of the Trustee who is sought to be made liable.

Further, Trustees are indemnified in that Trust Agreement. Trustees are entitled to be indemnified out of the Purpose Trust’s funds for all obligations or liabilities that Trustees reasonably and properly incur in the exercise of their functions in accordance with the terms of the Trust Agreement as Trustees.

Complying with Tax Obligations

The Purpose Trust minimizes tax risk to the Trustees because they clearly are not beneficiaries of the Purpose Trust. Further, the Purpose Trust is not subject to tax obligations under Guernsey law, which has no tax on the transfer or exchange of tokens. In the case of the Trustees, who transfer crypto on an ongoing basis as Trustees, the transfers can be made or tokens can be exchanged for others and then be transferred without the Purpose Trust having any tax obligations in Guernsey. Under Guernsey law, the Purpose Trust also has no tax filing or reporting obligations, which allows the Trustees to continue operating in the same way as before the Purpose Trust existed, albeit under the fiduciary duties that the Trust Agreement imposes on them.

Off-Chain Activity

If the Trustees desire to interact with the off-chain world, such as signing an off-chain agreement or opening a bank account to pay persons who do not accept tokens, then the Trustees will be able to do so as Trustees. The Purpose Trust is not a legal person, rather it acts in the name of the Trustees, who act in their capacities as Trustees. By acting as Trustees and informing any third parties that they are acting in their capacities as Trustees, the Trustees maintain their limited liability as noted above but can more effectively operate to carry out the purpose of the Purpose Trust. For example, the Trustees can sign agreements with grantees to ensure that grantees open source all copyrighted work they create with grant funds and have an enforceable agreement as to the other terms of grants to grantees.

Enforcer

The Enforcer has only the powers given to it in the Trust Agreement. Those powers allow the Enforcer to provide significant value to the DAO token holders by ensuring that the Trustees carry out the purpose of the Purpose Trust.

Specifically, the powers of the Enforcer in the Trust Agreement provided as an example with this framework include obtaining disclosure of information in respect of distributions made and spending by the Trustees from the Purpose Trust’s assets and conflicts of interests that may have existed in connection with any action of the Trustees.

No Enforcer is liable for any loss to the funds in the Purpose Trust because of any mistake or omission made in good faith or any other reason, unless it is due to fraud, willful misconduct or gross negligence on the part of the Enforcer. Moreover, the Enforcer is indemnified in respect of all expenses and liabilities reasonably and properly incurred in connection with the Trust Agreement.

Thus, with significant certainty as to limitations on liability and indemnification, the Enforcer can ensure that Trustees are carrying out their obligations to fulfill the purpose of the Purpose Trust.

Conclusion

DAO communities should consider exploring the use of the Purpose Trust under Guernsey law to determine whether it is an appropriate vehicle for the growth of the applicable DAO and protocol. This framework touches on only one specific use case but many more exist, such as (1) wrapping an entire DAO with all DAO token holders as Trustees; (2) holding the DAO treasury; (3) holding all IP (including copyrights and trademarks) along with transfers of repos holding the copyrighted code; (4) holding fees received from the applicable protocol to be distributed directly to other Purpose Trusts carrying out functions for the DAO; or (5) serving as a finance and operations hub for the DAO.

• (1) Disclaimer: This framework should not be construed as legal advice for any particular facts or circumstances and is not meant to replace competent counsel. None of the opinions or positions provided hereby are intended to be treated as legal advice or to create an attorney-client relationship. This analysis might not reflect all current updates to applicable laws or interpretive guidance and the authors disclaim any obligation to update this paper. It is strongly advised for you to contact a reputable attorney in your jurisdiction for any questions or concerns. This analysis was written by the dYdX Foundation. Special thanks to Marc Boiron, David Gogel, David Kerr and Joshua Watts for their contributions and insights. ↩
• (2) See Legal Framework for Decentralized Autonomous Organizations by David Kerr and Miles Jennings and Simple Code Deference Agreement by Gabriel Shapiro for developments in DAOs using the Unincorporated Nonprofit Association (“UNA”) formed under U.S. state law to comply with U.S. law and tax obligations. ↩
• (3) No limitation needs to be put on the duration of the Purpose Trust because the rules against perpetuities have never formed part of Guernsey law. ↩
• (4) It is particularly relevant to this analysis that the DAO members are prohibited from transferring the Purpose Trust’s assets back to the DAO and have, through the Trust Agreement, passed dominion and control over the Purpose Trust’s assets completely to the Purpose Trust itself upon the transfer of assets to the Purpose Trust. ↩
• (5) See PwC Annual Global Crypto Tax Report 2021 for a discussion of this issue: “It should also be noted that if a DAO is taxed as a partnership, this does not simply entail taxation of profits but it also creates other compliance obligations. Depending on the territory and the precise circumstances, the partnership may have filing or payment obligations, not only in respect of income taxes, but also in respect of indirect taxes, withholding taxes, stamp taxes, etc. There may also be requirements to create and retain transaction documentation. If such requirements arise, it may be unclear who has responsibility for them in a decentralized business model, and whom a tax authority may pursue for non-compliance. In a worst-case scenario, individuals who have become de-facto partners simply by purchasing a governance token could find themselves unwittingly liable, although this would seem to be extreme.” ↩
• (6) The potential impact of having U.S. citizens as DAO token holders must be assessed from the standpoint of U.S. taxation at the time tokens are transferred to the Purpose Trust to ensure compliance. To the degree the transfer of property to the Purpose Trust is done with treasury funds that are under the dominion and control of U.S. token holders and a foreign trust has, or is deemed to have, U.S. beneficiaries, application of Section 679 of the Internal Revenue Code (“I.R.C.”) would require treatment as a foreign grantor trust. I.R.C. § 679 is specifically designed to prevent U.S. taxpayers from achieving tax free deferrals on property transferred to foreign trusts and take precedence in the rules found in the grantor trust rules contained in I.R.C. §§ 673-678. Thus, if the Purpose Trust is created from property in a DAO rather than from property created upon creation of the DAO, then greater risk exists to U.S. citizens as DAO token holders. ↩
• (7) Note that any Trustee has signature authority over the Purpose Trust’s foreign accounts and, thus, any U.S. Trustees must file a Report of Foreign Bank and Financial Accounts (FBAR) on FinCEN Form 114. ↩
• (8) Under Guernsey law, Purpose Trusts do not have traditional beneficiaries. Rather, the Trustees and the Enforcer are obligated to fulfill the stated purpose or purposes of the Purpose Trust. To assess U.S. tax obligations—should the fulfillment of that purpose of the Purpose Trust involve financial distributions to U.S. citizens—the facts and circumstances would need to be assessed to determine the proper reporting obligations of the Purpose Trust. ↩