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NEAR Digital Collective Legal Framework – NEAR Protocol

NEAR Digital Collective Legal Framework

Community
March 21, 2023

To help accelerate real-world value creation in the NEAR ecosystem, the NEAR community has launched the NEAR Community Purpose Trust (for ease referred to in the remainder of this post as the ‘NEAR Community Treasury’). The NEAR Community Treasury is intended to serve as a decentralised treasury for the NEAR ecosystem that will allocate funds to support various grassroots initiatives.

The launch of the NEAR Community Treasury has been championed by the Governance Working Group (‘GWG’), a group focussing on ecosystem governance initiatives as part of the NEAR Digital Collective (‘NDC’). The NDC is an ambitious grassroots initiative that brings together users, projects, stakeholders and partners of the NEAR ecosystem to promote self-governance, aiming to empower the ecosystem to collectively make decisions on everything from funding to elected representatives and more. It is a significant step towards an even further decentralised network.

The NEAR Community Treasury leverages an innovative legal framework that builds on work that has already been done utilising Guernsey Special Purpose Trust frameworks elsewhere in the industry. The NEAR community hopes that this framework should help to bring much-needed clarity to participants in decentralised autonomous organisations (‘DAOs’). Below for discussion purposes only is a high-level summary of some of the key features of the NEAR Community Treasury framework.

What is the NEAR Community Treasury and how is it structured?

A trust is a mechanism for holding assets so that the legal title to those assets is separated from the beneficial interest in those assets. One or more trustees are appointed as the ‘legal’ owners of the assets in question, and those trustees are bound by various duties and obligations to hold those assets either:

  1.  for the benefit of one or more beneficiaries; or in certain cases,
  2. to further one or more specified purposes (with a trust of this nature typically referred to as a ‘Purpose Trust‘).

The NEAR Community Treasury is a type of Purpose Trust, specifically a Guernsey Non-Charitable Purpose Trust (a ‘GNCPT’). A GNCPT is brought into existence when assets are transferred to one or more trustees (the ‘Trustees‘), and those trustees enter into a written settlement of trust (the ‘Trust Instrument’) with another party termed an enforcer (the ‘Enforcer‘) which determines how the assets subject to the trust will be administered.

The Trust Instrument sets out the duties and obligations of the Trustees and Enforcer, and also the various purposes that the NEAR Community Treasury was created to support. The NEAR Community Treasury is governed by Guernsey law at its inception (although this can be changed by the Trustees with NEAR community consent). The Trust Instrument has been drafted to deliberately minimise the trust that the NEAR community needs to place in the Trustees, the Enforcer and any centralised administrator. The NEAR Foundation has no control over the NEAR Community Treasury, nor any ownership right or interest in respect of any assets held in the NEAR Community Treasury.

The Trustees are required to administer the NEAR Community Treasury in accordance with the terms of the Trust Instrument and are also subject to various fiduciary duties which require them to, for example, always act honestly and in good faith and exercise their powers in furtherance of the purposes of the NEAR Community Treasury. The Trustees are also subject to a duty of care which requires them to employ the care, skill and diligence of a prudent person of business when administering the trust assets. Both the Trustees and Enforcer are also required to comply with all applicable laws and regulations in connection with their roles.

The Enforcer has a fiduciary duty to enforce the NEAR Community Treasury in relation to its non-charitable purposes and has a proactive oversight function, monitoring the Trustees and their administration of the NEAR Community Treasury to ensure they are complying with their duties and obligations. The Enforcer has the power to request information and documentation from the Trustees; and also has the power to remove one or more Trustees in certain circumstances (more on this below).

The Trustees can use the assets in the NEAR Community Treasury for any transaction or arrangement that furthers one or more purposes of the NEAR Community Treasury, provided the transaction and/or arrangement has been approved by the NEAR community. 

At this stage, the NEAR community has not yet launched any on-chain voting mechanism (although there are various potential implementations in development). The Trust Instrument therefore also provides the Trustees with a limited power – subject to various constraints – to use assets in the NEAR Community Treasury for any transaction or arrangement that furthers one or more purposes of the NEAR Community Treasury without requiring approval of the NEAR community (the ‘Limited Trustee Power‘). Once an on-chain voting mechanism is launched by the NEAR community, this Limited Trustee Power will fall away permanently.

The Trust Instrument was reviewed by a set of skilled external and community legal counsel in Switzerland, the US and Guernsey. A group of lawyers from the NEAR community also reviewed the Trust Instrument, alongside various members of the GWG. The Trustees are required to make a copy of the Trust Instrument available to the NEAR community, and a copy of the signed Trust Instrument will be stored on IPFS (and this post will be updated with the IPFS link once it is confirmed by the Enforcer). 

The NEAR Foundation does have any control over, or ownership of, the NEAR Community Treasury

What are the purposes of the NEAR Community Treasury?

The purposes of the NEAR Community Treasury are set out in Schedule 3 of the Trust Instrument, and consist of two types of purpose:

     (i) Core Purposes: to support and promote the operation and/or development of the NEAR Blockchain and/or associated ecosystem. These Core Purposes cannot be changed by anyone, although new Core Purposes can be added by the Trustees with NEAR community consent.

     (ii) Subsidiary Purposes: there are various Subsidiary Purposes including to stake the majority of the Trust Fund that is NEAR denominated, and to consider and if thought fit approve funding proposals from the NEAR community. Subsidiary Purposes can be added or removed by the Trustees with NEAR Community consent.

Any assets held in the NEAR Community Treasury must therefore be used by the Trustees to support one or more of these Core and/or Subsidiary Purposes.

Who are the Trustees and Enforcer of the NEAR Community Treasury?

The initial Trustees are the following individuals from the NEAR ecosystem:

The initial Enforcer is Francesco Paolo Piatti, who is an experienced lawyer in the Web3 space. The initial Trustees and Enforcer were selected by the GWG, a grassroots community group that has been working on various ecosystem governance initiatives. The process the GWG used to select the initial Trustees and Enforcer is set out in detail here.

How do the Trustees and Enforcer operate?

There must always be a minimum of 3 Trustees (although there is no upper limit specified in the Trust Instrument). Trustees can be appointed and/or removed by the Enforcer at the direction of the NEAR community. The Enforcer also has the power to remove any Trustee where that Trustee has committed a breach of a purpose or a breach of fiduciary duty. Conversely, the Enforcer can be removed by the Trustees at the direction of the NEAR community.

Each Trustee has one vote on any proposal. Trustees are required to disclose any direct or indirect conflict of interest in respect of any proposal, and by default cannot participate in any vote where they are conflicted. The Trust Instrument prohibits the same person occupying the role of a Trustee and Enforcer simultaneously.

The Trustees and Enforcer are entitled to be paid a reasonable remuneration for performing their respective roles (and the NEAR community has control in respect of this remuneration on the basis that, to the extent any remuneration is put in place that the NEAR community disagrees with, the NEAR community can remove the Trustees and/or Enforcer).

What assets are held by the NEAR Community Treasury?

At the outset, the NEAR Community Treasury will hold 5,662,061 NEAR that was donated to the NEAR Digital Collective initiative by the NEAR community (along with a nominal amount of USDT that was donated by the NEAR Foundation, consistent with its legal purpose, as part of the administrative set-up process). The NEAR Community Treasury wallet can be viewed here.

The Trustees will administer this initial trust property as a proof of concept, enabling the NEAR community to establish how to best utilise this GNCPT framework and demonstrate that the NEAR Community Treasury framework can be used effectively. Moving forward, the NEAR Foundation (as well as other NEAR ecosystem participants) can make further contributions of assets into the NEAR Community Treasury based on the needs of the ecosystem.

How will the NEAR Community Treasury operate in practice?

The Trustees provided NEAR addresses, as well as Twitter and Telegram handles (but not physical addresses), in the Trust Instrument. They are able to make decisions as they would normally in the absence of the trust (e.g. via real-time written communications like Telegram or Signal) without having to adopt any additional formalities or bureaucratic processes.

The Trustees control the NEAR Community Treasury multi-sig wallet and can execute transactions that support one or more of the NEAR Community Treasury’s purposes from this wallet, with a majority of Trustees required to approve/sign any transaction. Any such transaction or arrangement must support one or more of the NEAR Community Treasury’s purposes and would require NEAR community consent; however as discussed above until the NEAR community implements some form of on-chain voting mechanism, the Trustees have the Limited Trustee Power to allocate funds from the NEAR Community Treasury without requiring the consent of the NEAR community. Any such allocations would still need to support or further one or more of the Core and/or Subsidiary Purposes.

Based on the GWG’s proposed framework, the NEAR community’s intention during this initial period is for the NEAR Community Treasury to receive funding proposals just from the 3 ecosystem grassroots DAOs – being the Developer DAO, Marketing DAO and Creatives DAO. The NEAR Community Treasury’s scope will likely be widened moving forwards as determined by the Trustees and the NEAR community, potentially becoming the primary treasury/capital allocation node in the ecosystem.

Based on input from the GWG, the Trust Instrument envisages that the NEAR community will develop an on-chain voting mechanism that leverages proof of personhood technology (i.e. technology that can verify there is an identifiable, unique individual controlling a NEAR account).

Once the NEAR community launches this on-chain voting mechanism, the Limited Trustee Power will fall away permanently. The NEAR community will then be able to put forward and approve funding proposals, and also direct the Trustees to take various actions including:

  • fulfill grant requests;
  • add Core Purposes and add/remove Subsidiary Purposes;
  • appoint/remove Trustee(s) and/or Enforcer; and
  • change the NEAR Community Treasury’s governing law.

What are the benefits of the NEAR Community Treasury structure?

  1. Participant Liability

One of the most significant legal issues currently facing DAOs and other decentralised initiatives is participant (or token-holder) liability. Recent legal developments (for example in connection with the CFTC’s enforcement action against Ooki DAO) have only heightened the uncertainty and risks in this context, particularly with respect to DAOs being classified as ‘general partnerships’ or ‘unincorporated associations’ and creating potential joint and several liability exposure for participants. This means participants potentially being held individually liable on an unlimited basis for their own actions, and/or the actions of the entire DAO/initiative, and/or the actions of certain participants.

It is the hope of the NEAR community that the NEAR Community Treasury may help to mitigate these potential participant liability issues:

  • The Trustees undertake (in their capacity as Trustees) certain activities and actions (e.g. holding treasury, making grants) that might otherwise expose ecosystem participants to potential liability. Other ecosystem participants do not undertake these activities and instead exercise oversight over the Trustees and Enforcer.
  • When the Trustees (a) act (as they are required to do) in accordance with the provisions of the Trust Instrument and their fiduciary and statutory duties as trustees; and (b) also make it clear to any third parties that they are acting in their capacities as trustees of the Community Treasury, then the liability of each Trustee should be limited to the value of the assets held in the NEAR Community Treasury.

In addition:

  • The Trustees are indemnified under the Trust Instrument, meaning that they will be compensated for any liability/losses suffered by them in carrying out their duties as Trustees from the assets held in the NEAR Community Treasury.
  • The Trust Instrument also makes it clear that the Trustees will not be liable for any losses arising to or suffered by the assets in the NEAR Community Treasury (save for any losses arising in respect of a Trustee’s breach of trusts arising from their own fraud, wilful misconduct or gross negligence).
  1. Off-chain activities

Without a formal legal structure, if a DAO/decentralised initiative wishes to participate in an off-chain transaction or arrangement then typically individual participants would be required to enter into the relevant transaction/arrangement in their individual capacity (and/or some other affiliated legal person); exposing them to potential liability. While the NEAR Community Treasury is a ‘legal arrangement’ and so not itself a ‘legal person’ (i.e. it does not have a separate legal personality from the Trustees, unlike for example a limited liability company), the Trustees are able to interact with the off-chain world – in their capacity as trustees – in a similar way as other entities (for example, opening a bank account). 

  1. Tax

Certain activities undertaken by DAOs, particularly holding a DAO treasury, can create complex tax consequences for participants (especially in the absence of any clear guidance). One critical risk is the possibility of tax liability arising in connection with DAO activities being attributed to (and so payable by) individual participants.

The NEAR Community hopes that the NEAR Community Treasury may mitigate that risk for participants by ensuring the relevant activities are being undertaken by the Trustees (in their capacity as Trustees). In addition, as the NEAR Community Treasury does not have any Guernsey resident beneficiaries or Guernsey-source income, it should not be liable to tax in Guernsey nor be required to make any on-going tax or reporting filings. 

  1. Efficient and trustless

Unlike many other alternative DAO legal ‘wrapper’ or ‘proxy’ structures, the NEAR Community Treasury does not rely on a centralised administrative body to be brought into existence or maintain its legal standing – the execution of the Trust Instrument by the relevant parties is all that is required. As mentioned above, there are also minimal operational formalities, meaning the Trustees can make decisions as they would normally (i.e. as if the trust wasn’t there). 

Under Guernsey law, there is also significant flexibility regarding who can serve as a Trustee or Enforcer, including no requirement for a locally-registered professional trustee/trust company to serve as a trustee. To the extent any disputes were to arise in connection with the NEAR Community Treasury, these would be heard and ultimately determined by the courts in Guernsey.

What happens if the NEAR Community Treasury is terminated?

The NEAR Community Treasury is irrevocable and can continue to exist for as long as there are Core and/or Subsidiary Purposes to support. The NEAR community could however direct the Trustees to transfer all of the NEAR Community Treasury assets to another trust (provided such a transfer supported one or more Core and/or Subsidiary Purposes).

The Trust Instrument also contains various contingencies in the event all of the NEAR Community Treasury’s Core and/or Subsidiary Purposes cease to exist and/or one or more Trustees undertake a transaction or arrangement that is in breach of one or more Core and/or Subsidiary purposes. In such circumstances, the Enforcer (acting reasonably and in good faith) has the power to direct the Trustees to transfer the NEAR Community Treasury assets to a new trust or otherwise deploy them for the benefit of the NEAR community.

Some closing thoughts

The NEAR community hopes that the NEAR Community Treasury framework will enable the NEAR community to benefit from a decentralised treasury in a risk mitigated manner. For more information about Guernsey Non-Charitable Purpose Trust frameworks, a template Guernsey Special Purpose Trust Instrument will shortly be hosted on the NEAR Foundation GitHub (and this post will be updated to include the relevant link, once available).


Disclaimer: Nothing in this article/post should be construed as legal, tax or investment advice. This post might not reflect all current updates to applicable laws, regulations or guidance. Any templates or documentation referenced in this post are made available on a non-reliance basis and the authors do not assume any responsibility for their contents or any consequences of their use. The authors disclaim any obligation to update this post, and also reserve the right to make any changes to this post without notice. The subject matter of this post deals with an emerging and uncertain area of the law and there are no guarantees (and none are given, of whatsoever nature, by the authors or otherwise) that the NEAR Community Treasury framework will effectively mitigate any of the risks identified above. In all cases persons should conduct their own investigation and analysis of the information in this post. Please consult with a reputable lawyer in your jurisdiction for any questions or concerns and before making use of any templates or documentation referenced in this post. Neither this post nor the NEAR Community Treasury constitutes, or is indented to constitute, the offer or sale of any security or token.


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