Proposal: Operation Wartortle

Governance Discussions Nexus Mutual DAO Proposals
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Background:
While Nexus Mutual is an on-chain autonomous organization, it is also represented by a UK-based limited company (Nexus Mutual Ltd.) that is regulatorily compliant with the FCA’s Mutual standards. This entity was originally set up to protect the core from a range of issues such as liability and tax relating to the Mutual while it was in a far more centralized state early on.

As an effort back then to remain compliant with UK regulations, it had to implement a variety of practices such as KYCing the members of the Mutual (all holders of the $NXM token). While these efforts protected Nexus Mutual during the early days of inceptions, these limitations also imposed barriers to global permissionless participation and ownership of Nexus Mutual. It complicated the user journey of acquiring smart contract coverage, prevented individuals from certain countries from participating in Nexus Mutual, and represented a challenge in properly distributing the $NXM token to the DeFi ecosystem.

Today, Nexus Mutual is in a state of decentralization and community ownership. It is now a global DAO with over 3,500+ members all around the world, processed 89 coverage claims, and an ecosystem with independently established organizations such as the Nexus Community Fund that is providing grants funding for community initiatives. Furthermore, with Armor and iTrust building on top of the protocol, we believe it is more important than ever to further increase decentralization and widen control of the protocol.

We believe that Nexus Mutual has reached a point of reasonable decentralization.

Proposal:
We believe that the need for a regulatorily compliant legal entity is no longer needed for Nexus Mutual and that it is in the best interests of the protocol to deprecate Nexus Mutual Ltd.

The decoupling of the Nexus Mutual protocol from a legal entity enables several benefits including the removal of KYC as a barrier to entry for Nexus Mutual participation and a variety of other reasons mentioned previously above.

We are requesting a maximum of $50,000 in $NXM from the Nexus Mutual community fund to begin legal due diligence for this process (all unused funds will be returned back to the community fund). We will be working with Norton Rose Fulbright on the legal analysis to produce a legal memo and with the core Nexus Team on determining the potential implementation strategy of this proposal. Norton Rose Fulbright is the original legal counsel that guided the formation of Nexus Mutual and its limited entity at the start.

This proposal is not intended to make such a decision for Nexus Mutual at this time but instead purely exploratory as a means to produce a report of how to precisely sunset the entity and the associated risks involved.

Background on 1kx
We were the first fund to invest in Nexus Mutual directly through the bonding curve and have been actively participating in community governance (see proposals: Nexus Mutual Community Fund, Pooled staking rewards and staking limits, Auditor signaling)

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This seems like clearly a good use of funds. Whether you lean positive or negative on this idea, scoping the viability from a legal perspective seems like a great investment to be able to make an informed decision. Very supportive!

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Such an exploratory measure would be a good use of funds, imo. Whether or not the mutual is ready to transition to a full autonomous organization through a DAO without a legal wrapper around it is another issue, but it’s not one that we can consider without some due diligence into the effects of dissolving the company limited by guarantee in the UK.

Ofc, the greatest concern would be how such a change would affect the development team from a regulatory point of view.

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Thanks for tabling this, agreed it’s a good time to set the wheels in motion on this front. Beyond the legalities of this process, it would also be helpful to understand the practicalities of going full-DAO and which areas will need further decentralization before that’s feasible.

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Support for this initiative, good to see it happening.

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It would be great if this can really be implemented

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I also support this proposal. If it possible, it would a huge step for Nexus and the security of DeFi in general.

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Agreed. Would be happy to vote for this proposal

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Fully support, removing KYC is necessary for mass adoption of Nexus Mutual products/services.

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@Hugh I’d like to hear your opinion before this comes to a vote

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I am very supportive of spending funds to conduct the legal due diligence, which is step 1. I think it’s important for members to discuss this, there are big pros/cons on both sides.

I’ll provide comments on the actual proposal once the facts are available.

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Would it be possible to see a legal summary of such a study after it completes? A list of risks/liabilities in operating in such a set up vs current set up would be appreciated.

Given the importance of this step, would it be prudent to actually have 2/3 legal opinions on the topic?

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Yup, we’ll aim to share the memo produced by the legal team on this.

While I’m definitely going to get it sanity checked by other legal counsel here, it’s often fairly marginal to conduct the full DD by 2-3 more teams of lawyers. 98% of the time, they’ll come back with the same analysis as the areas of contention of issues that are often obvious but it is instead the proposed course of action that will often differ depending on each legal counsel’s interpretation (generally from what I’ve learned). This is not to mention that it will take potentially months more to source and educate another set of UK based legal counsel that understands mutual law to advise on our matters here.

I’d look to get the analysis done, then see if we can sanity-check it as much as we can.

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What would be a reasonable timeline to get from where we are today to sun-setting the entity assuming there are no big surpises?

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Hello! This is an exploratory process to see what legal measures would have to be taken in order to unwrap our current legal structure. No ETA on final outcomes. Likely to be several stages before conclusion.

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Hi Christopher,

Has Norton Rose Fulbright begun their analysis and did they give any estimate for when we can expect the report to be finalized?

Thanks,

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We’re going to be receiving drafts of the legal memo by the end of this month. We’ll then have to proceed with sharing it and working from there.

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UPDATE: Norton Rose Fulbright has completed their analysis, but under a restriction that it is only shared with members of the mutual. We have been investigating technical options to do this, in particular https://www.mintgate.io/

Mintgate are working on some minor updates to enable our particular use case, this will allow you to log in with a Nexus Mutual member address, sign a message and then download the advice. We will get this up as soon as we can.

In the meantime here is a high level summary of the advice, as interpreted by me:

Nexus Mutual can either move to an Alternative Legal Structure (transfer assets to another legal entity outside the UK) or to a “Stateless DAO”. Members seem primarily interested in the Stateless DAO structure, so summary will focus on this.

Risks in moving to a Stateless DAO

  • Members will almost certainly lose the limited liability that comes with the existing legal structure, as it is very likely to be treated like a general partnership.
  • Significantly increase in legal and regulatory uncertainty due to the lack of a specific jurisdiction.
  • Regulators generally attach regulation to legal or natural persons and not technology, and may therefore attach regulation to those facilitating the Stateless DAO structure. To transition to a stateless DAO the mutuals assets have to be transferred to a natural or legal person and this person may acquire liability in relation to the Nexus Mutual Protocol.
  • Increased liability risk for individuals/organisations that may be seen as influencing or controlling the Nexus Mutual protocol. In particular, members of the current Advisory Board or core team and potential enforcement actions by regulatory authorities.
  • Increased risk of speculative claims (in the legal sense not the insurance sense) where third parties or token holders have suffered a loss and are seeking to claim against those with the deepest pockets / most material holdings.
  • AML/KYC is practically impossible to implement in a Stateless DAO structure.
  • Third party contracting becomes extremely difficult, as a UK general partnership cannot enter into contracts or hold property in it’s own right.
  • High likelihood of losing access to banking services, legal advice, accounting advice etc.

Recommendations for further advice

  • Any tax implications on the transfer of assets, as well as taxation under a Stateless DAO structure including VAT etc
  • Advice on the implementation of a Stateless DAO including transfer of assets, dissolving Nexus Mutual Ltd and other items.
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I believe that allowing Nexus distributors like Armour and iTrust (and more) to do the retail cover purchase protocol website integrations (a la Hodlnaut…and more to come?) thereby using Nexus distributors as a ‘buffer layer’ so that retail cover purchasers do not have to do KYC to buy (in)directly from the Mutual is a better balance of risk/reward than trying to remove KYC so that Nexus can deal direct with KYC-shy retail cover buyers.

Nexus should focus primarily on improving integrations with distributors, product development, direct sales to protocols/DAOs and attracting deep placid pockets of staking capital, and leave the retail cover sales and (lack of) KYC to the distributors.

Please someone correct me if I am missing something important, because a lot of money was spent on Norton Rose, implying that this was not obvious to everyone in the first place? Over to you, funders of Norton Rose…

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Are there any follow up actions being taken in response to this advice?