With Crypto Governance in CFTC Crosshairs, Mulls SushiSwap Legal Shakeup
Popular decentralized crypto exchange SushiSwap is considering revamping its legal structure, an attempt with potentially greater strength amid increased regulatory scrutiny of crypto projects run by so-called decentralized autonomous organizations (DAOs).
SushiSwap, whose DAO token holders decide on everything from leadership to artist grants, was advised this month to split into a trio of legal entities based in Panama and the Cayman Islands. The new structure proposed by law firm Fenwick & West LLP will “reduce risk,” according to an article posted Sept. 22 on SushiSwap’s board forum.
Managing crypto trading infrastructure via such investment collectives has never been riskier. Last week, the Commodity Futures Trading Commission sued the Ooki DAO for alleged violations of US investment laws, apparently targeting anyone who votes in that DAO – undermining the notion that “decentralization” can shield DAO members from liability.
However, the robust participation in Sushi DAO votes is a stronger call for decentralization than Ooki has ever seen, Nansen data shows. More than 1,800 individual wallets have voted in Sushi DAO in the past six months, compared to just nine in Ooki during the same period. That said, Sushi DAO’s influence is gathering around token heavyweights; crypto hedge fund Arca accounted for 29% of a vote in July on the collection of arbitrage profits, according to Nansen.
“Simply calling an unregistered group of individuals voting on governance for a DAO is not going to fly, and that’s what the latest lawsuits are aimed at,” SushiSwap chairman-elect Jared Gray wrote on the platform’s Discord channel on Thursday. (He won the election to become “head chef” with 62% of the vote from just two addresses.) “Currently, Sushi is unregistered and needs legal entity protection as soon as possible.”
A new leaf
Fenwick’s proposed legal structure marks the latest turnaround for a sometimes messy crypto-investment collective that has had more than its share of governance problems and executive casualties, including the ouster of former head 0xMaki.
Read more: Sushi tries to pick up the pieces: A DeFi Governance Case Study
According to Neil Bhasin, a DAO member active in the Fenwick talks, this effort marks a change of tone for SushiSwap. “I would like to see Sushi take a sophisticated approach to legal,” he said in a Telegram message. “Old sushi would neglect a lot of things (not just legal and not necessarily in a malicious way, just a lot to do), so maybe turn over a new leaf.”
SushiSwap’s “new leaf” was months in the making, Bhasin said, but it fell within hours of the CFTC’s lawsuit against Ooki DAO. This unprecedented action prompted key voices like Gray to step up their calls for a legal wrap that could shield SushiSwap from liability—and soon.
Making these recommendations a reality will take time, Bhasin warned. Fenwick has proposed splitting SushiSwap into three entities: a Cayman Islands foundation to manage DAO assets, including its treasury and governance procedures; a Panamanian foundation to manage the trading infrastructure on the chain; and a Panamanian company that runs SushiSwap’s front end. This could take about a month to implement if and when the community votes to approve it.
That is hardly a given. So far, community responses have ranged from demands for swift action to calls to go slow and digest the consequences. Some were wary of disrupting the “crypto-ethos” of unlimited decentralized governance by introducing state-based legal entities subject to local laws. This debate is raging across decentralized finance (DeFi), with many DAOs choosing to hand the reins over to these companies and foundations.
“TBH I really don’t think it’s possible to go full-dough,” Bhasin said, referring to the DeFi purist route. “At some point, you’re using a vendor that will lie before a government.”
