Han Verstraete from Otonomos on Company Formation for Web3 Startups & DAOs

[00:00:00] Umar: Welcome to The Accountant Quits, brought to you by the Web3CFO Club, a community by Request Finance. With a curated community of web3 CFOs from companies like Aave, The Sandbox, Binance, Consensys, Ledger, and many more, joining this club will allow you to network and learn best practices on web3 financial operations.

[00:00:24] Umar: On The Accountant Quits podcast, we discuss how blockchain will impact the accounting profession and how accountants should prepare themselves for the future of work. 

[00:00:34] Umar: My name is Umar, your host, and even if some might refer to me as the accountant gone rogue, my job is to provide you with the blockchain knowledge that you need that will be relevant for the accounting industry as a whole.

[00:00:48] Umar: Welcome to Episode 58. 

[00:00:50] Umar: Anyone who decides to build a project in web3 involuntarily accepts to have to surmount heaps of legal challenges in order to be legally compliant. Many web3 businesses are borderless and this places a big regulatory burden, especially for those in their very early days. 

[00:01:08] Umar: Whether you are a centralized or decentralized project in web3, planning to issue tokens, finding the appropriate legal wrapper for your DAO, and understanding the legal implications of distributing tokens to employees, speaking with an experienced web3 legal specialist might save you hours and money in the long term.

[00:01:29] Umar: You don't want to be losing sleep thinking, are we allowed to do that? Or have we overlooked something in our legal structure? 

[00:01:37] Umar: To help us better understand how to define the legal strategy for your Web3 startup and DAO, today I have the pleasure to speak with Han, the CEO and Founder of Otonomos. Since 2015, Otonomos has helped builders and investors in crypto form and maintain their legal entities in all major jurisdictions around the world.

[00:01:59] Umar: In this episode, you will learn what is a Token SPV and what is a VASP regime, legal wrappers for DAOs, the jurisdictions with crypto-friendly banks, framework for web3 startups and DAOs to choose a jurisdiction for incorporation and much more. 

[00:02:19] Umar: Han, welcome and thanks for taking the time to be here.

[00:02:22] Umar: To start, can you share a bit of your background, how you first became interested with blockchain many years ago now and the story that led you to co-founding Otonomos.

[00:02:35] Han: Yes. Thank you. So for all my sense, I do come from TradFin. I left 2001, so I jumped out. I think that leaves me less incriminated around the dotcom. So I was a Goldman Sachs for six years, started my career in London and seen a lot actually within sort of TradFin and Wall Street, but started out my own ventures out of the UK in the 2,000s, had two exits. 

[00:02:58] Han: My last one was actually, the Lehman Brothers in 2008, just before they collapsed. So that was lucky. And I was lucky because I, you know, the world was kind of down in the global financial crisis and I wasn't doing much, I must say, Umar, I was just reinventing myself, I guess, reading a lot, reading a lot about that nascent technology called Bitcoin had been sent the Bitcoin white paper.

[00:03:21] Han: Right, and really fascinated by how this could change everything in my mind, and still believe that, and then got involved with the early days of Ethereum, the very early days of Ethereum, where It was still a very small group and they were kind of like a traveling troubadour band, with Joe Lubin and Vitalik and so on and saw this whole happen.

[00:03:43] Han: Wasn't part of the core team. It was kind of trying to help wherever I could you know. Was then based in Singapore had moved from London. And so very much observing what was going on with, with a degree of perhaps more business realism, also scratching my head about a lot of things like the first ICO wave and so on, but just stood there and learned and helped where I felt I could contribute most, which was not with code because I'm not a developer.

[00:04:11] Han: And although I did sort of beef up a little bit on, on the technical side, I think you've got to recognize where you're strong at, which is really you know, how do you set up a business? How do you get it funded? How do you govern it? So we had a lot of discussions about where to incorporate, for instance, the Ethereum foundation that was then decided to be in Switzerland.

[00:04:29] Han: That was my first choice. And then there was actually a second foundation set up in Singapore at the time. Lots of more effort on Singapore. That was also the days you may not remember, or you may remember where there's a lot of talk about the sort of permissioned chains. That was kind of the first wave of adoption by the big banks.

[00:04:48] Han: I think. I think the Ethereum community lost a lot of time pitching with banks and sort of the Hyperledger and what have you. And luckily we saw that then turn around and go again, fully permissionless. And so I've been investing, holding more than anything, really never gave up the faith, despite all the ups and downs and helping now well over a thousand crypto projects, exclusively crypto web3.

[00:05:15] Han: We don't even take clients who do stuff in other areas of tech, like web2. And it's been, it's been fascinating to learn. We also put a fund together that gets some exposure to some of these clients of ours. You know, we believe in, so having fun, what can I tell you? Doing pretty much everything I feel like I want to do in life and keep on helping clients with Otonomos and then OtoCo, who I believe we're going to talk about as well.

[00:05:39] Umar: Beautiful. So, Han, I want to start our discussion today with the topic on, of token issuance. So for companies considering to issue tokens, there are a few factors for them to take into account from a legal point of view. 

[00:05:52] Umar: Factors such as first to understand the need to introduce a token issuing company. Or what's commonly referred to as a token special purpose vehicle, an SPV into the existing corporate structure or to choose jurisdiction with the VASP regime, spelled VASP, and that stands for Virtual Asset Service Providers. Also to understand what kind of token is being issued, whether it's a utility token, payment token, security token.

[00:06:23] Umar: So, I want to ask you first, this is something that I'm not myself so very familiar with. Can you start by explaining what is a token SPV and why it's needed for token issuance structuring? 

[00:06:37] Han: Yeah, sure. Can I just preface, Umar, that when we speak about compliance, right, you mentioned it also in your introduction, a lot of people go like, yawn, compliant, you know.

[00:06:48] Han: The way we come to this about self-preservation and protection of you as an entrepreneur, so a lot of people go like, oh, compliance is just complying with a lot of these regs that weigh on us and so on, and yes, that's true, but the angle I think one's got to take is really, okay, I'm an entrepreneur, I'm taking risks.

[00:07:06] Han: I'm doing something in a sort of regulatory no man's land still with token issuance and so on, specifically about the use case of the token issuance. Let me do the things right so I can continue to entrepreneur and I don't run the risk of being handcuffed when I land in JFK, enough to put it strong.

[00:07:24] Han: And so everything that I'm going to mention is really more from an entrepreneur because we are doers in the end. We're not a compliance outfit. We're not lawyers. We just want to see the space thrive. And make sure that the people who do stuff and take risks into space are kind of thinking about their self-preservation.

[00:07:41] Han: And that fits neatly in the token issuance, which is probably the single most contentious and kind of booby trap area of web3, right? And so the first thing, why an SPV?

[00:07:54] Han: Why an SPV is because it is so contentious and it could be challenged. Whichever way you structure your token distribution, whether it's an airdrop, whether it's a sale, whether it's putting it on a DEX, you have the potential to be challenged on the nature of the token, where you have offered is. So what do you do?

[00:08:13] Han: And this is very much something that is done in TradFin as well, is you set up a special entity where the risks are kind of ring-fenced from everything else you do. That's why the SPV. 

[00:08:25] Han: You do not want to jeopardize your foundation. At some point you will have a foundation or you have a foundation already that will later on issue grants like so many foundations have done in web3.

[00:08:36] Han: You definitely don't want to jeopardize your development company, wherever your data is based, okay, from doing a token issuance out of these entities. Because you really risk contaminating the stuff you build, the code base, whatever, by being challenged from the regulatory side. So just set up an SPV in a place where it works to issue a token.

[00:08:57] Han: And now that's, that's the next thing you got to figure out. Where does it work to issue a token? The big, the big bogeyman is obviously the United States. They're really the only ones who would even go after any team that did issue what is deemed to be a security token and offers it to the United States.

[00:09:14] Han: So the, the first thing you can do is you can say, we're just not going to offer this in the United States. You know, and with that, you already eliminate a lot of the potential sort of regulatory dangers. 

[00:09:26] Han: But it's, if I can just make an observation here, it's a real shame that we actually have to exclude what is still the biggest market for risk capital in the world.

[00:09:37] Han: And genuine serious risk capital, not, you know, yes, obviously there's also going to be quick rich schemes, but it's not the sort of the, the hyper trading environment that you sometimes find, like in Asia, it's really generally wanting to get exposure to new ideas and you have to exclude that market. So hopefully.

[00:09:59] Han: We can see some changes there where tokens can again be offered in the United States with regulatory clarity. But the short of it is, you cut out the United States, you already save yourself a major headache. And cutting out the United States, you've got to be careful about how you do that. Often just a, a VPN doesn't quite do it or geofencing the people who would buy your token.

[00:10:21] Han: You've got to go a little bit further than that. But I don't think we need to detail this now. The second thing is you choose a jurisdiction where at least from within the jurisdiction where you issued a token, that SPV is not subject to regs or heavy regs. 

[00:10:35] Han: Okay, so what you then do is you look at, okay, how's the security actually defined in some of these countries?

[00:10:42] Han: So when you issue a token and you say, hand on your heart, this token is a utility, this token is just a governance token, this token doesn't have the security elements according to the local laws, which are different from the Howey test in the United States. 

[00:10:57] Han: Then you got to go like, look, it seems like we can issue this token, even in places where they have this virtual asset service provider licenses.

[00:11:05] Han: Without having to have a license ourselves, because the good news is that at least, or let me rephrase that, that despite the VASP regimes, that most countries still let you issue a token if it's for your own fundraising purposes. 

[00:11:21] Han: VASP is really when you start making a business out of helping people, raising via token sale, doing stuff that basically it pays you bills by providing a service, hence virtual asset service provider. But if you're just there as a, as a project, you want to issue your token, you know, that the, the regs around securities are not as tight and securities are not defined the way they are defined in the United States.

[00:11:48] Han: You can actually still issue a token from some of these jurisdictions and our favorite, because we, we shop around all the time, believe you me, we look at what's happening and compare, but our favorite has been for a while now, the British Virgin Islands. Despite having a virtual asset service provider licensing regime, you can pretty much for your own project issue a token that may even have certain characteristics of dividending or revenue share, which in the United States would most likely be considered a security.

[00:12:17] Han: Does that help?

[00:12:19] Umar: Yeah. How would you compare like these countries where most of these projects would go to issue tokens, like you pointed out BVI, but I also understand there's like Switzerland, Cayman Islands. What would be the maybe differentiating factor to go with a BVI as opposed to Switzerland or Cayman islands?

[00:12:40] Han: Yes. So what is different, I guess, from web3 versus FinTech, right? Is that web3 projects tend to be having a much higher velocity and often also want to fail faster. So what you can't do is you can't spend 6, 9, 12 months applying for a regulatory license to issue your token. So I think it's just dumb to go to a jurisdiction where, you know, that issuing a token to your early fan base, 

[00:13:07] Han: When you say, look, I feel very strongly that our stakeholders should be beyond sort of traditional VC-type equity investors. I want to issue a token. I want to, to give them at least some governance rights and further down the line, or at the same time, some sharing in how we're doing, having to apply for a license for that purpose.

[00:13:26] Han: If you can arbitrage between jurisdictions, then it's maybe better not to go to a Switzerland where everything is heavily regulated. And I think sensible regulations, but heavily regulated Singapore, very heavily regulated, not as crypto-friendly as other people actually believe. On the ground, lots of, you know, lots of jumping on stage by the regulators there, but actually on the ground, quite heavily regulated, quite permissioned.

[00:13:52] Han: Same with Cayman Islands, which is definitely a step above the British Virgin Islands when it comes to the VASP regime. So, go for the place which is basically where water flows, where it's easier. Because you're at the beginning of a project, you want to experiment. Later on, there's a lot of things you can do.

[00:14:09] Han: We say that a lot to clients, Umar. We say, clients sometimes come to us and they go, Oh, token issuance and tax. And how are our profits going to be taxed? And how do I make grants to my community? And, and we kind of go, oh, let's worry in stages. You really don't have to worry about everything at the same time in life.

[00:14:27] Han: Generally, right? I don't really have to worry that much yet about, you know, I guess retirement funds or lots of stuff that we can worry about. We should just worry about, okay, you're at the beginning of a project. You want to issue a token. What's the best way of doing that? And then all the rest, even accounting in the very early stage, you want to have the systems in place, but you don't necessarily have to come up with a full audit from PwC in your first year.

[00:14:54] Han: Would you agree? Investors won't even ask for it. So go where it's easy to issue that token where you know you're going to be complying because you are complying with the local regs, you are taking precautions not to sell that token, if you believe it is a security token in the United States and you should be okay.

[00:15:11] Umar: Perfect. Very clear. I want to move on to speak about legal wrapper for DAOs. So, we previously spoke about DAO accounting on this show, on episode 29 for the listeners, but not about what legal structure is required for a DAO. The legal structure of a DAO is often referred to as a DAO legal wrapper, which would hold the DAO's treasury, protect DAO members from unlimited liability, and allow the members to take part in the decision making process, like for example, voting.

[00:15:41] Umar: The most popular way of registering a DAO is through a foundation. The foundation does not have any owners, meaning it has members, which are not really equivalent to the shareholders of a typical company. So I want to ask you to start, could you walk us through why a DAO would need to be legally registered and whether they need to obtain any specific licenses and do any KYC procedures in the beginning?

[00:16:07] Han: You're probably going to hear me jump off my soapbox now, because we have an allergy for the word wrapper. Let me explain. We don't ever refer to DAOs being wrapped in legal entities. Why? Because it's my personal belief that you cannot wrap a DAO, i. e. you can't shoehorn this whole new coordination mechanism.

[00:16:29] Han: Which is a wonderful, I think, progression from companies that are more hierarchical and permissioned to flatter structures, more democracy in decision making, and then we see people talking about wanting to shoehorn that spontaneity of the DAO into existing legal entity. That's not the way we think about it.

[00:16:50] Two things I want to say. First of all, we do believe that not so far in the future, we will see DAOs in themselves being recognized as having a separate legal persona, just like a company or a foundation or an association or whatever other legal entity, because the key nature of a legal entity is that it has its own persona.

[00:17:11] Han: So it's no longer Umar acting. It's Umar's company as a separate persona, plus having limited liability. And we've blogged about this, and I think it's going to come from international private law that kind of needs to recognize when an entity, say, in Switzerland does something in the United States, the U.S system needs to kind of accept that entity exists in Switzerland in the first place without knowing the ins and outs of how you register an entity in Switzerland. 

[00:17:37] Han: We believe the same is going to happen with DAOs at some point. The jurisdictional systems are going to say, well, this DAO, isn't that actually a new form of coordination mechanism similar to a company with its own legal persona. Anything we're doing now to make DAOs work is kind of a bridge towards hopefully a future where DAOs will be recognized, as legal entities with limited liability. 

[00:18:01] Han: If I can just add to that, limited liability companies, LLCs in the United States, I'm sure you're familiar with, are actually a relatively recent invention as well. They were pushed from a certain corner of the economy, the oil industry and the real estate industry, they didn't exist before 71, okay, and then Wyoming came up with a whole new type of company.

[00:18:23] Han: That was kind of, I mean, I wouldn't necessarily call it the bottom up request from industry, but it was, it wasn't state imposed. It was literally organically an evolution of a partnership, but with different characteristics. So the LLC was born and then the series LLCs were born. The same is going to happen with DAOs.

[00:18:42] Han: I don't have a single doubt about it. So when people speak about wrapping the DAO, they're really trying to kind of put restrictions like a straitjacket on what is a whole new different type of coordinating. Okay. A whole new kind of a bundle of contracts, which essentially is what a company is, right? At the end of the analysis, companies are bundles of contracts.

[00:19:02] Han: You and I set up a limited company in the UK, for instance, it's a contractual arrangement with a shareholder agreement, and there's got to be a lot of ancillary contracts between you and I. That's the same with a DAO, but it happens to be smart contracts, which are recognized as contracts. And so let's not wrap DAOs, let's have DAOs be the owners of legal entities. 

[00:19:27] Han: So the way we structure the foundation, which I'll touch on in a second, which is indeed very often used for DAOs to be able to use the treasury to make certain grants in the real world under a grant agreement, which the counterparty of which has to be some legal persona, i. e. the foundation, or to, you know, in another context for a DAO to be able to even pay employees, push code through more traditional development companies. 

[00:19:55] Han: The solution is not wrapping the DAO in a C corp in the United States or a UK limited. The solution is that you make it possible for the DAO to be the shareholder of these entities. You see how is that different from wrapping the DAO itself? We sometimes call these entities just pure extensions of the DAO, even handmaidens of the DAO in the real world.

[00:20:16] Han: So what we've done is we, we did kind of two things in that respect. One is on the Otonomos side with the foundations in Cayman Islands, where Cayman is very unique in that you can have a founderless foundation, so you don't need a named founder, right? And you can also structure, you do need to do a bit of legal engineering, but structure the foundation such that each and everything that happens in the foundation is basically subject to an on chain vote by your token holder community, your governance token holder community.

[00:20:49] Han: So in the end of the day, what you have is a foundation where there's no name founder, plus all of its governance is actually taking its cue cards from the DAO. So you actually have a DAO controlling a foundation and that foundation will then have its wallet where there's going to be treasury. Where the community will vote on, okay, do we think that Umar should receive a $10,000 a month grant because he's pushing code, he's podcasting for us, whatever contribution you make, wherever you are based, it's subject to an on chain vote, and you're getting the grant out of the treasury.

[00:21:27] Han: And then the treasury itself is just a multi sig with whatever governance protocol and signature rights over the multi sig that will put the transaction on by treasurers of the foundation. Okay. So real people who will effectively have to connect a Metamask or hardware wallet. 

[00:21:44] Han: There is a director in the foundation that is typically one of our entities on the Otonomos side. And that's just a placeholder because a foundation does need a director who implements and kind of puts a document trail in place of all of the actions that the foundation has done, including accounting. Okay, so that is a, an entity, it doesn't have to be a person that is director, but has no powers. We actually put a special resolution in place with all of the decentralized foundations we set up for our clients that says the director can only ever act upon a valid vote, that is taken at the DAO level. 

[00:22:22] Han: So it may sound a bit pedantic that I'm trying to make this distinction between a wrapped DAO and a DAO that controls, but it does preserve the DAO in its own right and it gives it the powers to aid if you want to have an extension in the real world to do stuff like granting or even set up a subsidiary like a development company. 

[00:22:45] Han: It could be an LLC in the United States. It could be any type of company where the shareholder is the DAO.

[00:22:51] Han: And that's something, the second thing I want to mention that we've achieved with OtoCo, which is a spinoff of Otonomos, started as a bit of a hobby project, but effectively lets people incorporate and manage their entities fully on chain, the entities themselves are on chain and the first owner of these entities is actually a wallet, cryptographic wallet. So that could also be a DAO wallet. I guess we're going to speak a little bit more about OtoCo later, but that's kind of the intro to what we're trying to engineer there. 

[00:23:22] Umar: Perfect. And do feel free to correct me at all times. I do appreciate you correcting me on not using the word legal wrapper.

[00:23:29] Umar: It's just, you know, it's like when, when the dad embarrasses himself on the dance floor is these lawyers who want to, it sounds so sexy, right, to say wrapping your DAO, but all they're doing is pushing their services in creating legal entropy. No, stay at the blockchain layer and make it possible for blockchain first, instead of that straitjacket.

[00:23:54] Umar: Yeah, I fell into that trap again. 

[00:23:56] Han: Not blaming you for it. 

[00:23:58] Umar: Anyways, I'll move on to, again, speak about some of the best jurisdictions for DAOs. I'm part of a chat group where someone the other day, they were asking for recommendation on jurisdictions for DAO incorporation, and at the end he said they chose the Marshall Islands.

[00:24:14] Umar: They considered Switzerland, Cayman, in the end they chose Marshall Islands. So for the listeners, two important considerations when choosing the best jurisdictions to incorporate the DAO would be, first you have to understand how decentralized the governance of the DAO will be. And then also what I understand is whether the profits will be then redistributed to the DAO members.

[00:24:36] Umar: So based on these two considerations, or feel free to share more, what are some of the best jurisdictions today to incorporate a DAO?

[00:24:44] Han: It's a good question. So in the same logic as what we talked about just before, right, let's say you and I, we have a DAO. What would that be in it's very minimal setup that would be a multisig on Safe, right? That's our DAO. 

[00:24:57] Han: And then yes, we can issue a governance token. We can have more people having voting rights over our project and our treasury. But a DAO is essentially a multisig wallet. Okay, for the purpose of this discussion. And so then the question is indeed, how can we now make sure that this DAO can do certain things in the real world?

[00:25:17] Han: And if it does certain things in the real world, including receiving revenue and so on, how can this be brought back to the DAO, to the DAO members? The key piece in all this is, and it's very difficult for more mature projects to actually get around this, is to set up a foundation. Maker had a foundation and then got rid of the foundation.

[00:25:38] Han: And I think they're going to be challenged on some of the stuff they're doing by not having a foundation. But the decentralized foundation is actually a very interesting setup where by virtue of you being a token holder in governance or a token holder, it doesn't have to be just governance. 

[00:25:55] Han: You can have dividend rights. You can have, you know, it could allow you to receive monetary benefits from the project. Like for instance, part of the revenue. That comes from your DeFi project by virtue of you being a beneficiary and by virtue of you being a token holder, you are actually a beneficiary in a foundation. You're not a shareholder, you don't receive dividends like shareholders, but you actually specify in the foundation's constitution that anybody who happens to hold the token with this smart contract address at any point in time is actually a beneficiary of a foundation.

[00:26:31] Han: So the legal mechanics of passing on benefits to your token holders is by virtue of them being a beneficiary in a foundation. 

[00:26:40] Han: That for us has always been the best way of getting revenue share. Plus obviously voting rights back to your token holder community. So a foundation will eventually become the centerpiece of any DAO, and then again, the most obvious jurisdiction there is Cayman Islands because of what I mentioned before, that the only place that allows memberless foundations. 

[00:27:03] Han: You could make this work in Panama, but there you have to do a little bit of hocus focus on the actual founder who needs to be a physical, a person who founds a foundation and work via client attorney privilege to make sure that founder's name stays out of, you know, official filings.

[00:27:20] Han: But the foundation is a key piece. So I hope the listeners will kind of take away that the foundation is a key piece. Then, and everything else is again, in that logic of, okay, where do we set up entities that can act in the real world so to say, to do stuff, to push code, to earn revenue, where there may even be equity investors.

[00:27:39] Han: Yes, Marshall Islands is interesting because it's, you want to think about the Marshall Islands as a carbon copy of an LLC, but offshore. For historical reasons, as you probably know, Marshall Islands was actually part of the United States, they copied the whole of the Delaware LLC laws And then they became independent and they kept that on their books and they're still looking at Delaware for evolutions on LLC.

[00:28:03] Han: And so you have a way of not dividending because it's not sort of a limited company with taxation at the company level. It's a sort of a partnership structure with pass-through where you can distribute profits back to the owner of a Marshall Islands LLC. And if that owner is a DAO, that means that the DAO will effectively receive whatever distribution out of a Marshall Islands LLC.

[00:28:32] Han: Okay, now how do you make a wallet, remember the DAO ultimately is a wallet, the owner of an LLC or a legal entity. You can, we have basically got a lot of legal advice that indicates that if a physical person, a company, a trust, an endowment, you name it, can be a shareholder, a member of a company, then a DAO too can be a member of a company.

[00:29:00] Han: That's kind of how we, you know, how we make sure that, uh, DAOs can effectively be owners of, for instance, a Marshall Islands LLC. 

[00:29:10] Umar: Before we continue, we'll take a quick commercial break from our sponsor. 

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[00:30:51] Umar: I want to move on to a slightly different topic, speak a bit about crypto friendly banks.

[00:30:57] Umar: So last year, after the demise of Silvergate and Signature Bank, Otonomos wrote an article on opening and maintaining a bank account for your crypto company. In this article, you contrasted how large institutional type players in the crypto space, such as bigger funds, including VCs, regulated OTC desks, the tier one crypto exchanges still seem to be able to be banked undisturbed, but the smaller crypto projects often face risk of being cut off from fiat on and off ramps. 

[00:31:29] Umar: Nearly one year after the demise of Silvergate and Signature Bank, can you paint us a global picture for those smaller crypto projects not to be choked off from fiat banking?

[00:31:40] Umar: What are you seeing in the industry happening? 

[00:31:43] Han: Sure, sure. So it's definitely not getting easier, whether there is a concerted effort. to shut down crypto by the TradFin community, I'll leave that open for discussion. I'm not typically a conspiracy theorist, but I do effectively see a backslash by a combination of regulators who, in my belief, are very much in the pocket of the banking industry and the banks themselves.

[00:32:08] Han: You know, who drives that effort is to be debated, but the net net is that it is becoming a lot more difficult and it's a real shame because you are killing the most vibrant and most active and ultimately job creating segment of the economy, which is startups. People with ideas who want to see their ideas where they can't get a bank account.

[00:32:30] Han: So the first question we always ask our clients is, do you actually need a bank account? Because often they come to us and say, I want this, I want this. I want a foundation. I need a bank account for my foundation. I need a bank account for my BVI token issuance vehicle. We go, , maybe you don't.

[00:32:46] Han: Let's not complicate life. Maybe you just don't, and they go like, why? I do need, I need fiat banking access. I say, look, let's go through the whole setup. You're issuing a token from a BVI token issuance vehicle. Once you've done that, what's the sort of the status? You've got proceeds from your token sale out of the BVI and you have probably a balance of native tokens because you won't have issued all of your tokens or sold all of your issued tokens is the right way of putting it.

[00:33:13] Han: What you then do is that the token issuance process is over, that special purpose vehicle Umar we talked about before, has kind of left, has lived its useful life. You move the proceeds of your token sale plus your balance of native tokens to a foundation. Foundation only has crypto, there's no bank accounts.

[00:33:33] Han: But it sits there pretty, which is treasury of crypto, including your native token. Then I'm granting you crypto as a developer, as a participant, as a blogger, as a podcaster, because you help us grow. And you have, let's say you have a development company in Portugal, I believe that's where you're based.

[00:33:56] Han: And I can just send crypto from wallet of the foundation to your wallet in Portugal. Now, surely you have it figured out how to do some off ramp into fiat because you have some fiat expenses. But me as a project, I don't need a fiat bank account for that. So I guess what I'm saying is that the locus of where banking is needed is often not at the token issuance state, at the foundation state.

[00:34:20] Han: It may not be necessary for the whole of your project to have a fiat bank. And if you do need one, just spin up a cheap and cheerful entity that is totally unattached to your structure like foundation, just standalone and sitting in Canada, spinning up a Canadian company that is owned by me and is receiving grants from the foundation.

[00:34:46] Han: Yes, I'm a lead in the project, but my little company in Canada will just wash its face from a tax point of view. We'll never really book a major profit. It's just an expense center to push code, to employ people, payroll and so on. 

[00:35:01] Han: And I'm sure because I'm based here in Canada, I can go to any bank. Hello, this is my passport. This is where I live. Please open a bank account, Mr. and Mrs. Bank, and I'm going to get a bank account. As a software development company, don't mention the C word, we say to clients, don't use crypto, you don't have to, you're a software developer. And so my Canadian company receives a monthly grant from your foundation, Umar, if you are working on a big decentralized project.

[00:35:30] Han: And I can pretty safely, through a centralized exchange, offramp my crypto that I receive from you into a bank account, so you see how the banking account is often at the very end, the last mile to pay stuff that otherwise can't be paid for, or in our own project, the Canadian company would pay for, say, the Google email accounts for our projects.

[00:35:52] Han: The web domain for our project, the fiat expenses for which you need a little debit card, you can basically from an accounting point of view as well, you can settle that with the foundation by saying out of the $10,000 we receive every month as a grant from the Foundation, the Canadian company in our, in our structure is going to pay the Google account, is going to get a Stripe account is going to get, and so that's where fiat really becomes relevant.

[00:36:18] Han: That's the first thing I want to say, there's a second part I want to say for entities that want to set up a bank account where it is most required is probably for funds, crypto hedge funds that want to take subscriptions from investors who are kind of new to crypto, who have fiat and want to wire in fiat to invest in the fund.

[00:36:38] Han: We have a lot of clients like that. Well, the good news is that there, a fund will be treated pretty much like a fund. Banks aren't really that concerned about what the fund is investing in. Even that, without misrepresenting, you can keep it very broad when a bank asks, okay, you're going to set up a fund.

[00:36:56] Han: What is that fund going to invest in? Oh, it has full flexibility to invest in any asset class. Okay, tick. You don't mention crypto. Any asset class. And so the bank goes, wow, we got a new institutional client here. We've got a crypto hedge fund based in the BVI and they will open an account for that BVI fund in the United States, in Canada, in OECD countries.

[00:37:19] Han: And by virtue of having your bank account for the fund in some of these countries, you don't get dragged into the tax because your entity, your fund itself is based in BVI or Cayman. So I think the short of it is to also be a bit smart about how you, where you locate your, your fiat expenses. When you're a startup and knowing that when it comes to funds and more institutional type setups, you will get banked because banks ultimately want your money.

[00:37:52] Umar: Now we spoke a lot about projects who have to issue tokens and projects have, who are incorporated as DAOs. I also want to touch on, let's say all the traditional venture backed startups in web3. Let's take the typical SaaS product. What would you say in terms of like their framework to come and decide where is best to incorporate themselves because they will have activities related to crypto.

[00:38:18] Umar: They will have to make payments to their employees in crypto, let's say. And these employees are oftentimes remote. They're not just based in one single local jurisdiction. What considerations should they have in mind before choosing a jurisdiction for their startup? 

[00:38:35] Han: It's a very good question. And it's really a dilemma, I think, for a lot of builders, right?

[00:38:39] Han: The dilemma is do I, our project through tokens entirely sort of without taking equity investors, or do I go for a more traditional type of investor who wants equity in the company. 

[00:38:55] Han: A lot is going to be driven by that decision. And yes, you could do both. And we'll come to that in a second, but it, it doesn't always sit that easy because the incentives of token holders may be slightly different from the incentive of investors.

[00:39:09] Han: The incentive of investors is look by their nature investors who take equity in your company, want to grab your cash flows. They want exposure to cash flows. You mentioned it yourself, the SaaS model is a model that's kind of tried and tested. Where, you know, that venture is going to be cashflow generative.

[00:39:29] Han: And so for an equity investor, it's interesting to have a stake in that company. So you kind of already going after VC or angels who want to have a stake in your company in return for giving you money, whether that's under a simple agreement for future equity or straight equity. That's just like a spectrum.

[00:39:48] Han: You start with a Safe, you probably end up giving up straight equity, but it will determine the entity you're going to set up. You can't go offshore when you're looking for VC type investment, it's going to be difficult. They want the predictability. They want the certainty that you're going to be paying taxes by, for instance, having a C corp in the United States, build a golden entity for VC funded ventures in the United States, ie, if you're going after majorly US investors. Okay. 

[00:40:19] Han: Or you're looking at a jurisdiction like the UK with a limited company, lots of legal certainty, knowing that there's going to be tax on profits and knowing the shareholder rights are protected, that this high level of sophistication in shareholder rights and obligations, all that's been litigated or established or a place like Singapore, which kind of emerging as a candidate, Hong Kong, to some extent as well, of a limited company vehicle where shareholders will be comfortable to be a co shareholder with you as founder or with the founder team.

[00:40:54] Han: That's the choice you're going to have to make. Is it worth giving up the spontaneity and the sort of the high level of democratization you can achieve by purely going tokens with a community on web3 to get your project funded, or do you go for more traditional venture capital? And that will determine the entity you're going to be setting up.

[00:41:19] Han: Okay, that's the first thing. The first thing I want to say. 

[00:41:22] Han: Then obviously once you chose for a venture funded business, it becomes a lot easier to then also have employees open a bank account and so on. So, so far, so traditional, even though the contents of your venture is web3, you know. 

[00:41:36] Han: Dapper Labs has done it. Some of the bigger NFTs are C Corps in the United States. Other place are UK limiteds, are Singapore private limiteds. 

[00:41:47] Han: So done in web2 and is now being done in web3, but it's a choice you have as an entrepreneur. And you've got to be very mindful that equity investors are your friend until they're no longer your friend, i.e they are, they have their own agenda and they may want to take control, economic control, governance control, and steer your company in a certain direction. Every founder should be aware of that. Okay. 

[00:42:11] Han: Now, what do you do when an equity investor says, can I also have tokens? Because they kind of go like, wow, you've got a token here.

[00:42:19] Han: You've got token economics. You've got tokenomics. You've got an inflation model, deflation model. More tokens will be minted. Can I please also get some tokens? Well, then you'd have a mechanism where as part of them investing a certain amount and getting equity, there's probably going to be some warrants.

[00:42:37] Han: Or some convertible where they also click into tokens and it makes sense for them because if your token has certain governance rights, then it's probably a good idea for them to also have some tokens so they can participate in governance as part of your community, so to say. 

[00:42:53] Han: But sometimes that relationship is a little bit uneasy between your community of token holders who don't have equity and a group of VC that is invested in your operational company does have equity and also has some tokens.

[00:43:06] Han: You're going to have to work it out. You're going to have to calibrate that quite carefully.

[00:43:10] Umar: All right, Han, it's time to speak a bit about Otonomos. Like I mentioned in the intro for listeners, Otonomos helps builders and investors in web3, to form and maintain their legal entities in all major jurisdictions around the world.

[00:43:25] Umar: Could you walk us through some of the services provided by Otonomos and maybe some of those major jurisdictions that you serve, which are very attractive to web3 projects right now?

[00:43:37] Han: I've got to make this the shortest session because I don't want to kind of chill. Basically, we, we take a whole new approach to being a formation agent and a corporate service provider in a sense that the traditional incumbent corporate service provider are all very analog.

[00:43:55] Han: It's a lot of paperwork. I want people to think about Otonomos first and foremost, as a technology company, a platform that lets you, yes, incorporate, and in some countries, there's stuff happening in the kitchen of Otonomos where there is analog filing, but you don't get to see it. You just taste the dish as it's being served, but you don't get to see what we have to do sometimes to get everything done.

[00:44:17] Han: We serve up everything related to your company and all of the jurisdictions with a dashboard, you can see everything that you've done, all of the entities you own, who owns it, where it's located, who's there, who is the shareholder with you through a technology platform. So think about Otonomos first and foremost as a technology company in a use case where there is no tech with the incumbents or very, very low tech.

[00:44:40] Han: It's also PDF at best often just still wet signed documents and, and faxes, you know? And so where do we operate? We operate pretty much anywhere where we feel there is demand for the web3 communities to build, invest, do stuff from. So somebody comes to us and says, what about Samoa? Well, guess what? We never have any inquiries about Samoa.

[00:45:03] Han: We're not in Samoa. We're not in Kitts and Nevis. We just don't see real demand from there. So we let it very much be driven by demand by the web3 community. And we make sure that people feel like we're very much part of the sharing the open source ethos. We don't charge for templates. Whilst law firms tend to charge for templates.

[00:45:26] Han: We share a lot in a first call with clients, I think people are actually quite surprised how much we share because what do we do? We take data points from now well over a thousand clients where we learn from how did they do things? How did we help them? If there was need to draw in legal advice on certain things, we learned from that legal advice as well.

[00:45:48] Han: And then we share on kind of a no name basis where we said, look, there's a similar project setting up a decentralized exchange. Yeah. This is how we set up BVI, token issuance vehicle, Cayman Foundation, development company in wherever that may be. And so sharing, sharing, sharing for us is kind of the key.

[00:46:07] Han: Okay. And that's because I believe that to help this space, which is open source, we got to be willing to share. We can't sort of sit on silos of knowledge like law firms do and then charge you even for a simple SAFT template, SAFE template. That model eventually is going to die. The more you share, I think the more in hard economic terms, the more revenue will ultimately book because people are going to come back because you share a lot.

[00:46:36] Han: You don't charge for things that you actually shouldn't get away with. Most legal firms, most even, run a little cartel. There's probably four major law firms on an island like the British Virgin Islands. Guess what? They sit together over dinner and they say, hey, for the next fund. This new thing that came out, how much are we charged?

[00:46:55] Han: Oh, well, it started 40K. But guess what? If you put in technology, you can cut out a lot of that. And so that's kind of the approach we're taking. So we're servicing the web3, we're sharing a lot, and we're doing this in all of the jurisdiction that we see a lot of demand for web3 builders and investors.

[00:47:14] Umar: I was quite fascinated when I went on your website and I saw OtoCo. So you briefly mentioned this earlier in our conversation today, and I want you to share a little bit more to our listeners. What is OtoCo? So the way I understand it, so on the website, you describe it as an on-chain company assembly tool to spin up and manage your entity or DAO with your Ethereum wallet.

[00:47:37] Umar: Basically, just like how you interact with a DeFi application, you just have to connect your wallet and create and manage your companies on chain and basically use OtoCo's smart contracts to reflect the different legal realities from your wallet. I think this is quite fascinating. Can you share a little bit more about how OtoCo works and the companies using it today?

[00:48:02] Han: Let me talk a little bit about the genesis. So Otonomos formation agent, remember corporate service provider, lots of tech, but ultimately technology is more of a web2 dashboard where we let you log in and see your entities. And as a result, the business is not pure tech in the way it scales. So it's probably more of a private equity over time.

[00:48:22] Han: It's also self-financing by the way because of its business model. 

[00:48:26] Han: Then about two years ago, I really kind of over a summer that must have been 22. I kind of thought as a hobby, almost, can we pull a legal stunt where you can actually validly spin up a real world entity from your wallet, DeFi style, as you say, from the comfort of your wallet.

[00:48:46] Han: Right, and so you will probably believe that we spent more on the legal engineering and the smart contract engineering. There's a suite of smart contracts. There is a company formation smart contract in there, which you need to contract, you know, you send ether into the contract in order to spin up your OtoCo.

[00:49:07] Han: But the legals behind that are actually quite sophisticated because you want to make sure that you can give people, your users, comfort that by sending Ether into a smart contract, they actually have a validly incorporated entity. And that was, that is probably still a bit the secret we're sitting on with OtoCo, but the beauty of it is that it's a pure tech play, smart contract, tech play. 

[00:49:32] Han: And so it can scale infinitively because we don't have a such any cost. Even the gas fees will be paid by you if you set up an entity. We have no marginal costs of spinning up more entities at OtoCo. It can scale vertically. And that in itself as an entrepreneur is actually quite an interesting proposition, one. 

[00:49:50] Han: Second, the idea that companies will actually be blockchain first. So instead of mirroring some analog layer and almost duplicating it by putting it on blockchain, can we just accept that blockchains will be the next technology layer and the ledger of truth in companies who owns them, who are shareholders, the governance of companies work, and we believe we can.

[00:50:17] Han: Now it's very frontier. That's why we did spin it off from Otonomos, okay. But blockchain can effectively be that ledger of truth and the ledger of who is an owner and the rails for transfer of ownership. That's what we all believe, I believe in web3 right? That blockchains will be ledger of ownership of an NFT, of a stock, of a real world asset that's on blockchain.

[00:50:42] Han: And also the rails for transfer. I want to transfer some of my shares to you. I should be able to do that on blockchain. Very different that you hash some traditional share certificate. And then I transfer that as a token to you versus native companies on, on chain, where your initial split of shareholders is 50 percent of the tokens belong to you because they sit in your wallet.

[00:51:08] Han: So it's a blockchain first approach with lots of smart contracts and decent legal engineering to make OtoCo possible. And we're very pleased about extraction. It really started as a hobby project. I was just reading Chris Dixon's book over last week. Actually, I blogged about it where at some point, I think I took a picture even and tweeted it.

[00:51:29] Han: He says a lot of promising projects start as hobbies. And this was effectively a project that initially started as a hobby and then got traction. And now just today we're at 1,190 entities that users feel comfortable to connect their wallet and use a, an entity. We don't count DAOs that are not incorporated in that count.

[00:51:54] Han: So 1,190 entities spun up on blockchain and people do it for all sorts of reasons. For instance, you want to own, you want to hold a governance token in a DAO instead of owning it in your own personal name, which you also know from an accounting point of view is a very different story than owning it through a company name and on behalf of the company.

[00:52:15] Han: So we see people spinning up these flash entities because they're instant to own tokens, to own NFTs, to pool some assets together, to invest with a group of people. More sophisticated use cases of DAOs controlling some of these OtoCo entities. So it's, it's wonderful to see how this is kind of being filled in by the community itself.

[00:52:37] Umar: And how to get started? Like, I feel I want to go and try it out after our episode today. Like, how can anyone get started? Just connect their wallet to OtoCo and. 

[00:52:46] Han: Yeah, just try it on Sepolia or on the Mumbai testnet. We, so you select the chain you want to do this on. Currently we have two, we're going to soon have a couple more.

[00:52:55] Han: And obviously that's Ethereum and Polygon, but if you just want to try it without paying the $49 plus gas fees for an actual entity, just go. Ethereum testnet, which is, Sepolia and, and Mumbai testnet polygon. And you will have the same sequence. You will see the amazing speed. Literally seconds to get a new entity that you can choose Marshall Islands, Delaware, Wyoming for LLCs.

[00:53:22] Han: And you have a Swiss association as well. If you want to be based out of Switzerland for specific use cases. And so, yeah, we're having a lot of fun Umar what can I say, we're really having a lot of fun doing this. 

[00:53:34] Umar: You're really a pioneer in this. Han for the last topic of the day. I just want to go through a little bit about the future of web3.

[00:53:42] Umar: So you've been in this space from its early days. For more than 10 years now, what are you looking forward to in 2024, which in your opinion could accelerate the adoption of cryptocurrencies for institutions? 

[00:53:56] Han: So I have been in this space for a long time, but I've also been perhaps a bit the victim of my own skepticism generally as a philosophy, I guess, towards life, where I stood a bit at the sidelines.

[00:54:07] Han: I looked at all the madness. I scratched my head and I was like, I don't understand this. I don't understand these ICOs. I don't understand what I'm getting. And so I guess the broader point I want to make, Umar, is that we have seen a tremendous financialization of this whole space. We sometimes say that this space has been built the wrong way round.

[00:54:26] Han: We first built all of the trading tools and all of the speculative. Yes, eventually you need an ecosystem. Right. We have it in traditional finance as well, but we build those first. We build decentralized exchange. And every day we still have people coming to us. They're going to set up another decentralized exchange.

[00:54:43] Han: Well, do we need more decentralized exchanges? Yeah. So more casino tools. And that's where my skepticism kind of came in. And only now do I actually see, yes, this whole DeFi is obviously fascinating and necessary, and I'm leaving out sort of the pump and dumps and the scams and so on. The infrastructure eventually had to be built, but I would have probably wanted to see some real use cases being built first.

[00:55:14] Han: Now, it's not for us to dictate how innovation works. It's sometimes starts like that, like some wild Cambrian explosion And then it kind of flows down and gets into real use cases. And so 24 for me has to be the year where we see some of these real use cases. For instance, tokenization of real world assets, the prime real world assets in my mind is actually company stock.

[00:55:39] Han: Because most of real world assets will not be held by Umar, they will be held by Umar's company, right? The moment you have more than one asset, you're probably going to have an entity holding what have you with accounting around it and so on. So people talk about RWAs, real world assets. 

[00:55:54] Han: Well, guess what? 85 percent of value in the world in our calculation is owned in private companies, not in listed companies. That's only 15 percent total market capitalization of the major stock exchanges, the airplane you fly in, the house you may be sitting in, the car you drive, if it's leased, you know what, it's probably going to be held at a private company.

[00:56:15] Han: So let's maybe not just tokenize the stock of a private company. Let's make it smart, programmable, with rights attached to it, transfer, no transfer, to whom can I transfer, right of first refusal, these things can all be coded at a smart contract level. And so that's definitely a use case. I am fascinated by other use cases, like for instance, proof of humanity, to some extent, basic income, but slight permutation of it, certifications, stuff that really, I think would bring blockchains to the attention of a wider audience, like university certificates, for instance, very simple example.

[00:56:53] Han: If you moved around the world, it seems like you have as well from, you know, you apply for a visa and you need to prove that you studied at certain universities. What a headache that is. You've got to go back to get your certificate from the registrar's office at your alma mater and so on. If we would have a system where an institution can watermark a diploma on blockchain, and it can only ever be that institution that watermarks it.

[00:57:20] Han: And obviously you have cryptographic proof for that. And you can just have in your wallet. You know, you agree to share that with some authority that can then say, okay, yes, you have effectively studied there. That could be a component towards identity, sovereign identity, which is kind of next level up from there.

[00:57:40] Han: You know, your personal information, which you decide to share at what moment instead of it always having to be out there, you know, the, those are for me, the bigger use cases. And then the financialization will be there to make sure that there is allocation of resources happening, hopefully in an optimal way.

[00:57:58] Han: There is participation from investors through the token and they can swap the token and they can throw it on a DEX and that's all fine, but we're going to start working on some of these big use cases. We're going over time. 

[00:58:11] Umar: Yeah, we are. And it's time to, to wrap up the episode. So to wrap up, Han, I've learned a lot just by preparing the episode today.

[00:58:19] Umar: And I'm sure the listeners have as well. Accountants need to be cognizant about company formation, about the different legal structures that would comprise the, for their Web3 startup. Has there been anything today in our discussion that perhaps we didn't touch on that as closing thoughts you'd like to share with the listeners?

[00:58:39] Han:  Look I would like to say to anybody who listens and is interested or already in web3 is not to give up, keep the faith, you know, it's very difficult to predict future technologies, future trends, but I do believe that we currently in the sort of the moment in time we are. We are witnessing something that not every generation can witness, which is a very radical paradigm shifting technology.

[00:59:05] Han: I think Jobs and Gates witnessed that with the microprocessor and the personal computer. Maybe a little bit before that, a generation that witnessed, you know, the printing press or the steam engine. But just think about that for a second. What I would like to say to people is we're really only at the end of the beginning here.

[00:59:22] Han: Despite already Bitcoin being around since 2008 and Ethereum since, what, 2014. It is still very much the end of the beginning. And like with every new technology, every new paradigm shift, there's a lot of resistance from vested interests who are making money as a result of how the current system is built. But ultimately, it will lead to, I think, a more fair and I like to think of more sort of participating economy where everybody can participate.

[00:59:49] Han: You have a project that I like, I should be able to just say, I like what you're building Umar. I want to somehow contribute. How can I do that? I can buy your token or I can get a grant from your project because I contribute with code, with podcasts, whatever. That's really where we should be aiming for.

[01:00:07] Umar: Han there's a last question, which I always like to ask my guests before they leave is, do you have a favorite quote or a maxim that you live by? 

[01:00:16] Han: Well, I would probably be that worry in stages as a builder, you know, we're doers ourselves, and if you worry about everything at the same time. So you come to this space, you have an idea, try not to worry about everything at the same time.

[01:00:30] Han: Maybe don't worry immediately about accounting. You probably got a honeymoon period of about six months, a year before you really start worrying about accounting. And then after your first year. You find somebody who can help you clean up a little bit, some of the expenses you've done, maybe some expenses or some expenses that you paid for personally and how that then evens out with the accounting of the company, what have you.

[01:00:52] Han: Just don't worry about everything at the same time. It's going to cost you a lot more worry, a lot more money, sorry, to try to fix everything from day one, get the systems in place, be serious about putting the system in place that you will need eventually, but just work in a sequence is kind of what I would want to give to everybody who does stuff, who builds in this space.

[01:01:15] Umar: Perfect, Han. Thanks a lot for your time today. Thanks a lot for coming. Before we go, if people want to reach out to you and they want to learn more about Otonomos, how should they do so? 

[01:01:26] Han: The best is picking up on our Telegram group, which is kind of called, you know, OtonomizeYourself, but otherwise just han@otonomos.com. It's probably the best way to start. And then I can distribute it in the team. We can help on calls. Always happy to help. 

[01:01:47] Umar: Well, thanks again for coming in today, Han, and we'll speak very soon. 

[01:01:51] Han: Thanks Umar. 

[01:01:53] Umar: I would like to thank everyone for listening to this episode. You will find all the links of the episode, show notes, and transcript on the website of The Accountant Quits at theaccountantquits. com. 

[01:02:04] Umar: Please note that this content is for general information purposes only and is not a substitute for consultation with professional advisors. If you do know anyone who could benefit from the episode and you care about them, please do share the episode with them. All the episodes are available on Spotify, Apple Podcasts, and Google Podcasts.

[01:02:24] Umar: And by leaving us a review and rating, you will support the channel and all your fellow accountants. In order to be notified each time we release a new episode, do follow us on Instagram and LinkedIn. We hope to have you with us next time. Bye for now.