With Crypto Governance in CFTC Crosshairs, SushiSwap Exchange Mulls Legal Shakeup

Popular decentralized crypto exchange SushiSwap is mulling a revamp of its legal structure, an effort with potentially greater potency amid increased regulatory scrutiny of crypto projects governed 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 divvy itself up into a trio of legal entities based in Panama and the Cayman Islands. The new structure proposed by law firm Fenwick & West LLP would “mitigate risk,” according to a writeup posted Sept. 22 in SushiSwap’s governance forum.

Governing crypto trading infrastructure via such investment collectives has never been riskier. Last week, the CFTC sued Ooki DAO for alleged violations of U.S. investment laws, seemingly targeting everyone who votes in that DAO – undermining the notion that “decentralization” can shield DAO members from liability.

The robust participation in Sushi DAO votes is, however, a stronger claim to decentralization than Ooki has ever seen, Nansen data shows. Over 1,800 individual wallets have voted in Sushi DAO in the past six months, compared to a mere nine in Ooki over the same period. That said, Sushi DAO’s clout pools around token heavyweights; crypto hedge fund Arca accounted for 29% of a July vote on collecting arbitrage profits, per Nansen.

“Simply calling an unregistered group of individuals voting on governance a DAO isn't going to fly, and that's what the newest lawsuits target,” newly elected SushiDAO leader Jared Grey posted in its Discord on Thursday. (He won the election to become “head chef” with 62% of votes coming from just two addresses.) “Currently, Sushi is unregistered and needs legal entity protection asap.”

A new leaf

Fenwick’s proposed legal structure marks the latest turn for a sometimes messy crypto investment collective that’s had more than its share of governance snafus and leadership shakeups, including the ouster of former leader 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 conversations, 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 & not necessarily in a malicious way, just lots to do) so perhaps turning a new leaf.”

SushiSwap’s “new leaf” was months in the making, said Bhasin, but it fell within hours of the CFTC’s lawsuit against Ooki DAO. That unprecedented action prompted key voices such as Grey to sharpen their calls for a legal wrapper that might protect SushiDAO from liability – and soon.

Turning those recommendations into reality will take time, Bhasin cautioned. Fenwick has proposed slicing SushiSwap into three entities: a Cayman Islands foundation to administer DAO assets including its treasury and governance procedures; a Panamanian foundation to manage the on-chain trading infrastructure; and a Panamanian corporation to operate Sushi’s frontend. This could take about a month to implement if and when the community votes to approve it.

That’s hardly a given. So far, community responses have ranged from demands for quick action to calls to go slow and digest the ramifications. Some were wary of disrupting “the crypto ethos” of unmitigated decentralized governance by introducing state-based legal entities subject to local laws. That debate is one that rages across decentralized finance (DeFi) with many DAOs opting to hand their reigns to these corporations and foundations.

“TBH I really don’t think it’s possible to go full degen,” Bhasin said, referring to the DeFi purist route. “At some point you’re using some vendor that will lay down before a govt.”