The legal challenges of the Web3 industry
Today, in most countries, legislation on virtual assets is relatively new, with only a handful of countries offering some degrees of regulation and guidance. At the same time, many Web3 teams working on Web3 projects that may be affected by virtual assets and Web3 legislation, are distributed around the world, making things even more complicated. The blockchain technology on which these Web3 teams build their solutions (protocols, DeFi/GameFi, DAO, etc.) has erased any boundaries for users of these solutions, making them borderless. In other words, these Web3 organizations and their industries are international by default.
As a result of these features of the Web3 industry, Web3 founders now face distinct challenges regarding the legal aspects of their Web3 projects. These challenges can be summarized in the following three points:
- Web3 founders have to create multi-jurisdictional legal structures for their projects. There is currently no single, ideal jurisdiction that would allow Web3 founders to operate a business with the ease and seamlessness that Web2 founders can enjoy. Instead, Web3 founders are often forced to split their different business requirements across multiple different legal structures and jurisdictions; from hiring a team of people to setting up and using bank accounts, and issuing tokens to structuring their DAO for decentralized management of on-chain protocols. A multi-jurisdictional approach is required to collectively solve all these tasks.
- Web3 founders have to constantly monitor changes in legislation. Unlike founders of Web2 companies, a Web3 founder must constantly check the status of the legislation under which they have registered their Development Company, or issued their tokens, or established their DAO. Even more astonishingly, Web3 founders must be prepared to plan and execute a migration of one of all of their own companies in situations whereby applicable legislation evolves and the jurisdiction no longer presents as “friendly” to decentralized technologies or the Web3 company’s needs.
- Web3 founders have to manage multiple legal, tax, and accounting contractors across multiple jurisdictions. This point is not to be confused with the first point, as this evaluates the challenges Web3 founders face with ongoing maintenance and management of different contractors after the tricky process of choosing where to establish their different businesses has been completed. At this stage, Web3 founders must be prepared to juggle multiple different relationships, some of which may need to collaborate on certain tasks, and many of which will be spread across a variety of jurisdictions. A Web3 founder may have a DevCo, TokenCo and DAOCo registered in completely different jurisdictions, and must be prepared to coordinate, manage and quality check the ongoing works by each individual contractor.
It is not surprising that in the face of these monumental challenges faced by Web3 founders, many find themselves holding a full-time job of “legal manager”, overseeing all the legal requirements of their business. Having such a complex–and often unexpected–additional role can be consuming and overwhelming to even the most capable individuals, and offers no guarantees that the Web3 founder will “get it right”. Absorbed into a world of legal queries and legalease, many Web3 founders risk neglecting their other responsibilities, and being distracted from developing their Web3 project and building their Web3 communities.
This is a scenario that the Web3 legal team have experienced first hand, both here at Legal Nodes and in previous professional capacities. Consequently, the Legal Nodes team have developed a solution to help the tired and defeated Web3 founder struggling to join the dots on complicated (and remarkably unclear) Web3 legal requirements.
The Virtual Legal Officer (VLO) is a uniquely trained individual who acts like a conductor to an orchestra, the latter being made up of legal, tax, and accounting experts spread around the world. The VLO has evolved through Legal Nodes’ ongoing work with Web3 founders and startups. Here’s an overview on how VLOs help Web3 founders.
Virtual Legal Officers for Web3 founders
Virtual Legal Officers (VLOs) are unique professionals who combine international law and business backgrounds with real-world experience. This combination helps VLOs better understand their client's business case and navigate all the regulations that might apply to the business.
Grounded in their expertise, Legal Nodes’ Virtual Legal Officers also have access to Legal Nodes’ legal knowledge base, which consists of practical case studies and the latest updates on regulatory offerings from local providers. Since 2018, the Legal Nodes team has conducted over 300 Legal Discovery Sessions with Web3 founders. During these sessions, clients are informally interviewed, so that the Web3 legal team can better understand each client’s current position, future goals, and legal needs. The Web3 legal team have also been able to amalgamate many different case studies on all the different legal structures utilized by Web3 founders.
In addition to these Legal Discovery Sessions, Legal Nodes have created an international legal network of over 100 qualified local legal providers from over 20 of the most crypto-friendly countries. Having such a vast network allows Legal Nodes to constantly update the internal legal knowledge base, thanks to the stream of constant insights provided by locally-based legal partners.
So, how do VLOs actually help? To start with, VLOs cover the three main areas of work for Web3 founders:
- Legal project management for their companies
- Legal quality assurance and supervision of external legal providers
- Compliance management of the Web3 company’s activity
These areas of work – that could also be described as “functions” – are vital for Web3 projects. By examining each function in more detail, the need for a VLO is clear.
Legal project management for Web3 companies
As part of the legal project management function, the VLO helps the Web3 team to:
- Navigate the options of the most suitable jurisdictions and structures for their project. Web3 founders need to find the right legal structure situated in the right jurisdiction that offers the most crypto-friendly regulation for their Web3 project. Web3 founders must also take into account the business model, tokenomics, and plans for DAO, when making decisions about where to establish various legal structures. It is here that the VLO can provide an all-encompassing perspective that helps founders make informed decisions that do not overlook any options. The VLO uses the legal knowledge base and the large network that provides the latest regulatory updates on all crypto-friendly countries, to pick out the very best options for each client’s unique needs.
- Build a Legal Roadmap and outline the necessary legal work. At every stage of Web3 business, there will be different legal works required to keep operations compliant and to protect the project and participants from regulatory misalignment. Legal matters include; growing and managing the team, fundraising, protocol launch, token issuance, DAO formation, and more. For this, the VLO uses case studies from other successful projects to help map the best routes for the client. This ensures that the roadmap prepared for the client is based on current best practices, all of which is researched and provided by the VLO, and not the Web3 founder.
- Select and manage the service providers who will work on the Web3 project. This includes outlining a budget and deadlines in accordance with the Legal Roadmap, and selecting the most suitable service providers to work on the different tasks on the Roadmap. The service providers are usually based in the jurisdiction that they operate in, meaning that VLOs may be managing several lawyers in different countries. The VLO is able to provide cost estimates and find service providers relatively quickly by tapping into the globally spread network of Legal Nodes legal partners, most of whom have already pre-agreed fixed prices for various types of legal work and are able to provide special discounts for Legal Nodes clients.
The VLO does not provide legal services. Instead, the VLO acts as a legal project manager or personal assistant with specialist legal insight, able to assist Web3 founders with making the complex, costly, and time-consuming decisions of sourcing, hiring, and managing the right legal team to manage their legal projects. Most importantly, the VLO provides a fundamental starting point to all Web3 founders: they provide vital information on which of the most crypto-friendly countries might be suitable for each client, and therefore, where the client should start building legal structures for their business. Once those initial questions have been answered, the VLO speeds up the process of completing tasks by assisting with orchestration of all Web3 legal works, including sourcing trusted legal partners from the vetted Legal Nodes network, and clarifying both the prices of their services and the terms of execution.
Legal quality assurance and supervision of external legal providers
After the Legal Roadmap has been designed and approved, and all prices, deadlines, and providers for each of the legal works have been agreed upon, the Legal Roadmap is ready to be implemented; work can begin.
Most Legal Roadmaps will contain plans for several different external legal consultants to work on all or part of the task list. The problem with involving external consultants is a knowledge barrier between the consultant and the founder; it can be difficult to ensure that the external consultant has a complete and accurate understanding of the client’s project.
Often, the work of external consultants may contain inaccuracies as a result of misunderstanding aspects of the client's business model, or their goals, for example. To prevent misunderstandings, and to keep the work of external consultants in line with the goals and needs of the founder, the Web3 founders themselves will become involved in the legal works. They may find themselves preparing legal documents, taking actions to submit applications to register their company, doing research to better understand the results of the service provision, and even finding themselves making corrections to the legal documents themselves, all while communicating with the various external legal providers.
How VLO helps with legal quality assurance and supervising of external legal providers
In short, managing legal matters can be an absolute nightmare for Web3 founders, and this reality helped shape the role and purpose of the VLO. In order to remove the burden that so many Web3 founders come to struggle with–independently managing external legal providers–the VLO independently monitors the progress of legal tasks performed by each external legal provider and provides a single point of communication for the client. The Web3 founder can then hand over vital tasks that must get done, to the VLO with the confidence that they will get done. The VLO:
- regularly communicates with external legal providers to clarify the status of different tasks and check on the performance of the service provider and level of quality of the legal works;
- reviews the intermediate results of the work and analyzes them to ensure that they meet the client's business goals, as determined during the formation of the Legal Roadmap formation;
- acts as a single point of communication for Web3 founders, removing Web3 founders from the management of the different external legal partners, and always keeping Web3 founders informed with important updates.
By positioning the VLO between the Web3 founder and the external legal service providers, the Web3 founders stand to save significant amounts of time otherwise spent on independently vetting service providers, and ongoing management and communication with them too. The VLO effectively covers this scope of work by:
- having a clear understanding of the client’s business goals and their unique Legal Roadmap (helping tackle the issue of legal service providers struggling to truly know the client and the best solution for them);
- using their access to the Legal Nodes database that offers case studies and best practices (meaning the Web3 founder benefits from a third perspective, the VLO’s own insights, ensuring any improvements that external service providers could make to the Web3 founders legal tasks can be identified and provided without additional fuss or financial requirement) ;
- receiving special training and internal training courses from Legal Nodes so that each individual is properly equipped to help every client they work with. Each VLO undergoes training through a program developed by Legal Nodes that focuses on effective communication and management of external legal providers. This helps the VLOs to assign tasks to external legal providers much more efficiently and accurately, as well as to manage their work effortlessly.
Compliance management for Web3 companies
Usually, the process of legal work does NOT end when a document is prepared or a company is registered. As mentioned before, legislation in the field of Web3 is only just now being formed and new clarifications and new changes to the legislation appear regularly. In addition, to support companies registered in different countries requires constant monitoring of when each company should renew their authorizations/licenses, submit tax reports, conduct audits, and undertake any other necessary tasks to remain compliant and fully operational.
This requires Web3 founders to constantly monitor changes in legislation, or requirements for reporting deadlines, and more. This task of monitoring to remain compliant is another key function provided by the VLO and one that is immediately removed from the workload of the Web3 founder.
How VLOs provide compliance management for Web3 companies
Compliance management involves constant monitoring of whether the company's activities meet current legal requirements, and also involves preparing the company for new legal requirements in cases where the legislation has changed or will change. This, in turn, determines the functions of the VLO within this area of responsibility, namely:
- monitoring the latest changes in legislation in the countries where the client's companies are registered or where the client's company has clients, partners, or investors. The VLO can rely on the constant contact with the network of Legal Nodes’ legal partners from different countries and areas of law, who regularly share the latest news about changes in Web3 legislation in their jurisdictions of practice;
- maintaining a calendar of reports (tax, accounting, auditing) for the company from the client's structure;
- if the client's business model has changed or the launch of a new product is planned then the VLO organizes the receipt of legal / tax opinions from local partners to find out what compliance measures need to be implemented so that the launch of the new product does not violate the law.
These three functions of the VLO demonstrate how the VLO is an orchestrator and supervisor, and not actually a legal service provider. In fact, fundamentally, the VLO does not provide any legal services (they are not a qualified legal services provider), but instead an overseer of the company’s overall compliance. The VLO knows when it is time to subcontract necessary qualified providers or consultants to analyze updates that occur in the law or in the client’s business, to help avoid future legal problems for the client.
Three key roles that Web3 founders can handover to their VLO
The various functions of the VLO offer great benefits for Web3 founders. In summary, here are the top three most impactful advantages for Web3 founders who use a Virtual Legal Officer.
- VLOs prepare a unique Legal Roadmap for the Web3 project, detailing prices, terms and legal providers. Here the VLO acts as a legal project manager;
- VLOs supervise the process and progress of work undertaken by external legal providers. VLOs verify the results and check everything is compliant with the company's Web3 goals. Here, the VLO acts as a legal quality assurance supervisor;
- VLOs supervise the Web3 company's ongoing regulatory compliance. In cases where changes in legislation or changes in the business model or changes to the launch of Web3 products take place, the VLO acts as a compliance manager.
Three key benefits for Web3 founders who use VLOs
In handing over the role of legal project manager, legal quality assurance supervisor, and compliance manager, Web3 founders can:
- save time on researching crypto-friendly countries, searching for relevant legal partners in different countries, and tracking changes in legislation;
- avoid fines and other risks associated with late deadlines, and non-compliant business models, etc.; and
- attract investments for their Web3 projects with a clear and confident understanding of the legal strategy and with willingness and readiness to undergo legal due diligence from investors.
Disclaimer: the information in this guide is provided for informational purposes only. You should not construe any such information as legal, tax, investment, trading, financial, or other advice. Mentioning any of the assets in this article is not an endorsement to purchase them.
Nestor is a Co-founder & Head of Web3 Legal at Legal Nodes. Having over seven years of legal consulting experience, Nestor loves working with innovative startups and Web3 projects, helping them navigate the regulations and scale on global markets.