Why Wyoming? Wyoming Digital Asset Law

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Annie: Hello, everyone, and welcome to today's webinar, "Why Wyoming? Wyoming Digital Asset Law." So my name is Annie Triboletti, and I'll be your moderator for today.

So joining us today are guest speakers Matt Kaufman, Lucas Buckley, and Tyler Garrett from Hathaway & Kunz. So I would like to welcome our presenters and take things over from there.

Matt: Well, good morning, everyone. This is Matt Kaufman. I'm going to kick us off to maybe get things started today. Not sure how familiar our audience today is with blockchain technology, digital assets, and kind of the regulatory framework that's been forming the last several years around it. But our firm has been very involved. In case you're not familiar, Wyoming has garnered a reputation over the last five or six years of being the most aggressive state in the Union when it comes to passing digital asset regulatory framework. And we'll go through a number of the bills that Wyoming has passed and some of the ways that the U.S. Congress is currently modeling legislation after what Wyoming has adopted.

But before we dive into that, we thought it might be important to kind of do a level set on the technology and sort of generally walk people through and explain what the technology is, how it works, and why it's important. So we're going to start there.

So kicking things off, just to kind of get a working definition for those that may not be familiar, what is blockchain. So blockchain is generally a descriptive term for distributed ledger technology. So what is distributed ledger technology? The idea behind distributed ledger technology is that instead of having one central database, like a central server, which we're all familiar with kind of traditional computer architecture when it comes to central server databases, where there is one single point of failure, one single point of attack, one single central repository where that information might be accessed from, and people access that central database and then pull it. The idea behind a distributed ledger is that you distribute that, right, and you spread that across a number of nodes or hosts on the network, wherein they all run mimicking software and they constantly check with each other to make sure that they have the same information.

And so, again, the idea behind this is that if there's not one single point of failure, if multiple computers, if multiple servers, if multiple nodes is the common term in the blockchain industry are running that software and constantly checking with each other to make sure that they have the same information, the same database, you could almost envision this like everyone's running an Excel spreadsheet and we're constantly running software to compare and make sure that that spreadsheet is the same. And if anyone changes it, everyone has to agree, right, that that change is agreed upon by the network in order for that change to be accepted.

So that's generally what we're talking about with distributed ledger technology. So moving on to the next slide here, so where does the term "blockchain" come from? So to effect or create a transaction on a blockchain or using this distributed ledger technology, there's a couple of components that you have to have that are based in encryption technology. So every participant on the network is granted a public key, and that's often some sort of an alphanumeric code that is a public identifier. The participant on the network is then assigned a private key, which is something that only they have, right, and you utilize that private key to create a digital signature on a blockchain.

When you put that information together, right, on some sort of a transaction or a movement of data or value, it creates a hashed history, where you have a description of the transaction with the combination of the private key and the public key. It creates this block of information. With that block of information, you start stringing those together, thus the name blockchain.

And so this technology really kind of is an amalgamation of a couple of different technologies that have been around for quite a while. I mean, as I just mentioned, the key concept is based on cryptography and using pseudonymous identities on a blockchain. We're going to talk more about that as the presentation goes on. There's I think in many respects a large misnomer in the world that blockchains are 100% private and anonymous. That's sort of the case.

Most technologists that that we work with refer to it as pseudonymous because your public key and your and your identifier on a blockchain is again, as I mentioned, typically an alphanumeric code of some sort. That might be gibberish to somebody else, right? They don't know what that is. But if you're using that same public key to complete transactions on a blockchain, if or when somebody identifies that that address is correlated to you or to a particular company or to a particular wallet address, it's not necessarily so private anymore because that can then be searched to determine what are the transactions you've completed on a blockchain. So again, we we'll talk more about that as the presentation unfolds.

But the first concept would be cryptography. The second is peer-to-peer network. For those fellow Gen Xers, we all remember like the music file sharing days, where you could go online and upload music and other people could get on and download it and Napster and all that. I mean, that was peer-to-peer network file sharing. This is, again, a related technology or related concept. We're just using an encrypted version of that. But it's just simply creating a publicly shared file system or publicly shared database that multiple people can access and change. It just requires a certain blockchain protocol, like in number three, and as we talked about creating that digital signature and that digital record of the transactions that are being performed on the blockchain.

So as you move forward on any particular blockchain, that's why people refer to them often as immutable because once a transaction is recorded on the blockchain and then the next transaction is recorded and so forth, it becomes impossible from a computer standpoint to go back and change or undo a transaction because to do so would affect every other downstream transaction. So that becomes very, very difficult.

So that's kind of a very, very quick, high-level overview of blockchain technology and sort of again the combination of technologies that that make up what we're talking about. So this is just kind of putting everything I just described together, so how does it work, and again this is very, very basic, very high level. And understand that there's many different types of blockchains. There's private blockchains, public blockchains. There are different styles of blockchains where transactions are approved on a network in a different way.

This sort of example that we're building on today sort of assumes something called a proof-of-work network, which if you're familiar with Bitcoin, Bitcoin is a proof-of-work network, where you as a participant on the network have to basically perform algorithmic functions and problem-solving on the blockchain to verify, right, that everyone's ledgers are the same and that the transactions are legitimate and proper. And by doing that and showing your work to the network and that you've solved it, you get rewarded for that participation.

Well, there's different types of networks, such as proof-of-stake. If you've heard of Ethereum, which is the second largest cryptocurrency, that's a proof-of-stake style network. And there's many, many others, but they're all just different ways to ensure and incentivize that participants on the network are honest and that they're creating valid transactions and that false transactions are rejected by the network.

But with those assumptions built in, so assuming that you're participating in one of these networks, so someone requests a transaction. It's broadcasted out to the network, that ledger database that we talked about where everyone can see what's being requested. The computer software, the algorithmic problem-solving searches everyone's copies of the database, again remembering back to that decentralized, distributed form of record keeping, it's not just one central database, to make sure that everybody's ledgers are the same and that everything is correct and fits. Once that that's done, it creates that hash block of information, which gets added into the chain of transactions and it goes on. And then, obviously, this continues into perpetuity.

So again, that's kind of the idea. I mean, these are all just blocks of data. It's a data storage and data movement technology. But what's revolutionary about it is people are using this data movement to move value across the internet instead of just information.

So yeah, with that, kind of give a little bit of a snapshot here about the ways in which people in the industry are currently utilizing a blockchain technology, and again this is really high level. There's a ton of nuance to this, and there's a ton of new and inventive things that companies are doing. But kind of in the big buckets, most everyone is familiar with sort of the digital currency bucket, right? A lot of people have heard of Ripple XRP or Bitcoin. These things that have some trust, agreed upon value factor to them that people use as a method of payment or to store value. People are using that for all types of payments and commerce and lending and microfinance. So that's one bucket.

Then we have smart contracts. Ethereum, that I mentioned before, is the most common and by far the largest smart contract blockchain network. People are using that for all types of things. They're creating electronic record keeping protocols, escrow functions. We've worked with clients that are actually trading real estate and putting real estate title on a smart contract for purposes of instantaneous title closings. Supply chain management, all types of things.

Then you have securities. Again, this is probably, at least in my mind, the most unexplored bucket because it sort of requires taking sort of traditionally regulated services and products, that are regulated by banks, broker-dealers, financial markets, and creating ways to trade those assets and move those assets and settle those assets on a blockchain. But people are securitizing all types of things. They're creating debt instruments, derivatives. People are performing crowdfunding, or I'm sorry, private placement and public place placement functions on a blockchain. So that market is incredibly new, and it's growing very fast.

And then we've got record keeping. People are working in a lot of these areas. We have clients that are working on voting protocols maybe just for corporations. But there's also test projects with respect to creating digital identities for people and then allowing voting on a blockchain, where you could do instantaneous verification. Again, we talked a little bit about some of the title functions, healthcare records. You name it, there's a whole host of activity right now around record keeping and sort of the verification of title and records using a blockchain. And a lot of that is again because of that immutable component that we talked about, that as you utilize a blockchain and create those blocks of information, it becomes very, very difficult, if not in some cases impossible, to go back and change the earlier information, which makes it very secure from a from a cybersecurity standpoint.

So given that background and kind of just the level set on what this technology is and what it does, what has Wyoming done? I mentioned at the outset that Wyoming has been by far the most aggressive state in the nation at passing legislation. So this certainly isn't all of them, and we're going to spend all day and Tyler and Lucas are going to talk about other bills and other aspects. But I thought it might be great just to give folks kind of a high-level snapshot of some of the groundbreaking bills that have been passed.

So first and foremost, the state of Wyoming kind of put its name on the map, if you will, with the Token Exemption Act in 2018. And this came sort of on the cusp of a lot of discussion about people doing public launches of what sort of the industry termed as ICOs, initial coin offerings, sort of playing off of the IPO terminology, to utilize their token on a blockchain to raise money for a project or to offer interests in that network publicly. Of course, we now know that a lot of those tokens were securities, and so the sort of regulatory framework around that has been very undeveloped, but is developing.

Well, Wyoming was the first place in the world, that we're aware of, to create an actual definitional framework around offering a token. Now, obviously, we believe that this token exemption in Wyoming is an intrastate exemption, right? It doesn't really help anybody outside of Wyoming or relying on cross-border or federal exemptions. But the idea behind the token exemption was we created a way in which in Wyoming as long as your token meets certain definitions that you can offer that token to the public in an exempt manner in Wyoming outside of a securities offering. So that was kind of the first big thing that Wyoming did.

One of the other big things that Wyoming did, that's caught a lot of national news attention, is the creation of a new type of digital asset enabled bank called a special purpose depository. This one is interesting to me and near and dear to our firm's heart because we're very active in this space. If you have followed the news over the last 18 months in the crypto space, the collapse of FTX and the collapse of BlockFi and Celsius, and some of these major crypto institutions, well, what was going on there? What's the big thing that people care about?

Well, the fact is they weren't banks, right? Those institutions were operating as trading platforms, and they were custodying people's assets. But there were very few rules at the time and very little clarity about what the legal relationship was over those assets that these institutions were holding on behalf of people. And as it turns out, because they weren't banks, because there wasn't a legal bailment or a proper custody relationship, when those institutions failed, it came down to their terms of service and a contract matter, right? And so those assets were property of those institutions, which was a surprise to a lot of people that were using these platforms. But it's also made a very messy and difficult unwinding of those institutions where people have lost money and things.

So interesting to me that Wyoming actually set one of these institutions up years ago and then we had this massive collapse. And now we're seeing kind of the use case play out where the idea behind the Wyoming SPDI was they're fully reserved institutions. They act like banks. They can't rehypothecate those assets. They're not allowed to lend customer assets. So it's a way to hold digital assets in a fully reserved, audited, and regulated by the Wyoming Division of Banking manner. So a very new, novel charter.

We have four of these charter institutions have been chartered. We also have trust companies in Wyoming that are enabled to custody under the same regulatory regime. Those have become a very, very popular institutional mechanism for custody and things. So that's been a very active space in Wyoming.

We have digital asset custody standards. So Wyoming was the first place again in the Union to create digital asset custody standards, which looks like an audit manual. I mean, our Division of Banking and the State of Wyoming actually have an actual audit manual that is developed on how to examine these institutions based on SEC and CFTC principles.

Wyoming was not the first place to pass the financial technology sandbox. I believe Arizona was. But Wyoming might have been the second or third. But this is a new idea. The financial technology sandbox is a regulatory mechanism where it allows companies that maybe are dealing with new financial technology, that don't know where they fit in the regulatory regime or what lane they're supposed to be in, and it creates a mechanism for companies to basically apply for exemption for a period of years to say, "Hey, look, we're here. This is what we're doing. We don't know how to regulate it because laws haven't necessarily caught up with technology." And so it's sort of the best way that they can be regulated for a period of time while state legislatures figure this out.

This is interesting because my personal opinion is this is going to be a big topic in the coming years. My last conversation with somebody at the federal level was I think there's now maybe 13, 15 states, something that have adopted the fintech sandbox. And there's a growing number, and there's push for reciprocity among states to create sort of a way for companies to operate under that. So something to keep an eye on.

And then I'll kind of breeze through the rest of these because we're going to cover them in more detail. But again, Wyoming was the first state to enable corporation records to be stored on a distributed ledger, the corporate security issuance on a distributed ledger. And then Lucas is going to talk a lot about the digital asset commercial framework that Wyoming passed, which was the first of its kind in the country. And then also Tyler is going to talk and dive more into the decentralized autonomous organization, the DAO LLC, which Wyoming also was the first place in the country to create, which is kind of a blockchain enabled entity.

And then the last one I just wanted to mention was the Wyoming Chancery Court launch. This has been a fun project. Our firm has been very closely involved. But for those of you fans of Delaware, you know Delaware has the famous Chancery Court, which is the home court for a lot of publicly traded companies and others in large part due to the Chancery Court. Wyoming launched its own Chancery Court, which has been active now for, gosh, I think like 14 months or something. And so Wyoming has not only created a court to deal with corporate and commercial disputes, but specifically to help develop law around this digital asset technology as it develops and matures. So that's something new.

I think with that I'm going to hand it over to Lucas to talk a little bit about the digital asset framework.

Lucas: Sure. Thanks, Matt. Actually, the Chancery Court is a good launching point for what I was going to talk about, which one is how Wyoming has kind of, I'll say, on the ground figured out or decided how it's going to deal with some of the legal issues that arise with digital assets and kind of treating them as personal property. And I think really our goal has been to try to fit this unique thing, which is these digital assets, I mean what is that, right? I mean, you can't go put your hands on it. In kind of typical thinking, you can't conceptualize like who do I go to if I want to garnish this because it's a distributed ledger. You don't have a specific gatekeeper. You can't garnish an account at a U.S. bank and things.

And so I guess the point is talking about those things really brings us to talking a little bit about litigation, which I think we've seen a rise in certainly in the past 12 months. And folks who know the space will know the term "crypto winter," which is what everyone calls it when the kind of prices go down. I mean, I think there's a general thought that innovation ceases with the crypto space. Although I think on the ground that's not necessarily true. I think there's actually a lot probably more innovation now than there was even in the height of the market in 2021, when a lot of folks were just shilling I can't say the actual word but poor coins we'll say, things that just someone went out and ran a script off of GitHub to create a fake token, the Lucas token. And you hope that it spikes enough that you can pump and dump it.

All of those things and I guess to get back to my point have led to I think a good amount of litigation. And we've seen a lot of that litigation in Wyoming and certainly through the Chancery Court. One of the benefits of our Chancery Court has been that it's designed to be very fast and to make decisions, which no offense to, of course, the thousands of other courts and jurisdictions that people litigate in this country, but is often a complaint. And especially in the digital asset space you've got investors, you've got a lot of other interested parties, and I think the value of the Chancery Court has been that we move pretty quickly.

And I think what we're seeing again is that Wyoming's framework of identifying and sort of fitting these digital assets into the sort of legacy legal structure has been very effective. So one, we end up with the property issues as indicated on this slide, and I'll get to that in just a second. Certainly we also end up litigating just the contracts, right? I mean and that's what maybe intuitively people don't think about like is every digital asset case a securities case and is something completely beyond the pale of what a general practitioner might face. But it's really not. I mean, a lot of these are contract cases. They're fraud cases, perhaps no surprise. Sometimes with merit, right, as I said with the sort of kind of scammy coins that might have been issued, but sometimes without. But you can say, well, blockchain, Bitcoin, Dogecoin, clearly you've got security and you've got fraud. I don't think that's necessarily true, and I don't think the cases are necessarily bearing that out.

But what has happened again is that really we've used these legacy frameworks to try to define this process or this new asset class, and it seems to work. I mean and Matt and Tyler I think probably right now have a few more active cases than I have in our Chancery Court, our federal court and our state courts. But I've run through a lot as well, and honestly the reason I don't right now is because they've gone pretty smoothly. They've gone about as easy as you can expect. And again I think a lot of that is due to what Wyoming has defined these assets as.

And so as indicated then on the slide, really what we've done is lock these into typical property law. So a digital asset, right, it's a scary term, magic internet money, whatever it is. But it's personal property. That's all it is. It's not personal property you can go out necessarily and put your hands on, and it's certainly got its own set of issues that you might have to deal with. That's important for practitioners, I think, to understand because if you don't understand the things that Matt talked about, then of course we're always happy to talk to folks offline and things too, but if you don't at least have a passable understanding, you can't even start to figure out again how do you garnish these things, but very possible under Wyoming law.

So we really define three mutually exclusive subcategories of a digital asset. One, the digital consumer asset, right? So there's a line of cases in the federal court system that talks about is something or is it not a security. And there's this idea that, right, if you have a certain even if you call it a share, but you have a certain interest in an apartment building and that interest that you own allows you a one or two-bedroom apartment or whatever it might be, do you then have a security because you can trade that or potentially make some money off of it? Well, the courts have said I think nationwide now that if it's a consumptive asset, right, so if it really gets you something more than just the ability to hope it goes up in price and sell it or if it goes down in price, you short, if you really get some use out of it, then that's going to be one of these digital consumer assets.

Now exactly what fits into what bucket in Wyoming hasn't been tested, and certainly you've also got to look at the federal regulatory framework because you're always going to be dealing with SEC rules and securities rules. But the typical idea would be a digital consumer asset is something like ETH. It gets you access to this network, which is kind of a global computer. It gets you the ability to buy computation on that network. And so I think the typical idea would be that's kind of a digital consumer asset. And again, in every way, these are always imperfect examples.

But second, then we've got a security, and that's a security in the true SEC securities law sense, right? I've got a coin that the really only thing that I can do with it is hold on to it and hope it gains in value based on the work of others. Of course, everybody probably that's interested in the space has seen some of the Ripple decisions and the finding that, broadly speaking because I think it's a pretty nuanced decision, but the finding that potentially the XRP token is not a security, and so simply trading in the XRP token will not put you in the crosshairs of the regulators. A more typical digital security would probably be a lot of these kind of tokens that are out there, and realistically a lot of them to call them a security is probably too kind because a lot of them are really just pump-and-dump schemes.

But that's exactly what the federal securities laws are designed to protect against. Wyoming has acknowledged, yes, there's absolutely a class that we're looking at digital securities. And I think where that matters probably in a lot of cases is if you're under digital security and under Wyoming law, you're very clearly within the purview of securities laws at the federal level. Really there's no other value or intrinsic value to the item, other than the hope to gain some value over time.

Third, then the virtual currencies. So one, it has to be a medium of exchange, store of value, unit of account, and two, it can't be the dollar, right? It can't be legal tender recognized by the U.S. government. That would potentially someday maybe exclude from a virtual currency in Wyoming something like a CBDC, a central bank digital coin. And that's been talked about, but I think we're a long way off probably at the federal level.

A typical virtual currency, again, we would expect to see something like Bitcoin, right, typically especially as time has gone on recognized as a store of value. It's sort of the settlement layer, the Treasury bond of the digital currency space. It's going to be considered a virtual currency.

Interestingly, and Matt didn't mention it and I'll only mention it briefly because it's very new, but Wyoming is the first jurisdiction, and maybe worldwide even, that has enacted legislation to issue a stable token. Stable tokens are kind of the new buzzword in digital currencies. I think in years past it's been NFTs and things. I mean, the stable token really being a dollar is a dollar, and then a dollar in the stable token is a dollar, but you're not potentially subject to two days clearing and all those different things. And we'll see if Bitwire improves some of that.

But the virtual currency and stable token space is getting very interesting, and of course I would be remiss not to mention that that's being looked at the federal level as well. And depending on what the federal government does, if anything, then that could be preempted. And certainly there's going to be issues of preemption under federal law that come up, one, specific to the Wyoming Stable Token Act, but certainly relating to digital assets more generally.

So that's digital assets under Wyoming law. And okay, so jumping back to and getting to this idea of legislation, well, why does it matter? If I can switch my slide or someone else can, for some reason it's . . . there we go. So what can we do once we understand that these digital assets are really just personal property?

Well, we can perfect security interests in them. We can execute on them. We can establish a framework that already exists and is somewhat tailored to figure out and ensure that if you're dealing with a Wyoming company, in the digital asset space you can have protection to know that if someone is pledging their Bitcoin to ensure that a loan is repaid or to buy a property even, then that can be perfected, it can be secured, and it can be done in a way that ensures that somebody is not going to pledge the asset and then have it just disappear into the ether .

There are a lot of ways to do that, and Wyoming law recognizes, right, you can perfect a security interest, but then have you really controlled it. And again, there ways to do that. One that I think is becoming increasingly popular are multi-signature arrangements. So the issue with digital assets right now, well, or in the past maybe because I think the multisig wallets are improving this, was that if I say, "Listen, I've got a Bitcoin. I'm going to promise that I won't do anything with it. I'm going to use it to repay you if I can't repay you otherwise," and you say, "Okay, that's great," but we don't actually perfect the security interest through some sort of control, then, of course, I walk off, I give it to Matt, and I say, "Oh, sorry, I don't have that Bitcoin anymore."

And guess what you're not going to be able to do, convince all the nodes on the Bitcoin network to unwind my transaction. They just won't do it. They have no interest in doing it. Once a transaction on any chain presumably, at least public and publicly verified, has been effected, it's more or less immutable, and there are some very notable exceptions to that. But because we can't unwind the transaction, then how much does a law matter if it says that I can pledge my Bitcoin as a security interest where there's no teeth to it?

Well, multi-sig arrangements, possession through custodians, those are those sorts of things. Then I say, "All right, I'm going to give up control or the ability through just having my own private key to alienate my Bitcoin." I can give that to Matt. I can enter into an agreement with Matt and Tyler that two out of the three of us have to agree to any future conveyance of my Bitcoin. And in doing that, we really can avoid the problem of the immutable ledgers and the inability of a court to, right, issue an order that says, hey, Lucas' Bitcoin is garnished. Who do you send that to if I just have a private key? One, no one else can have my private key. I can chew it up and swallow it, if I need to, to avoid enforcement, and two, the nodes or the network itself isn't going to care what a court in Wyoming says.

So entering into these sorts of agreements does allow us to really perfect those security interests. And I guess zooming out from that, the broader point is it allows business to be conducted on the blockchain. It allows businesses to feel comfortable that they can have enough security and enough safety when dealing with digital assets and their ability to collect those, that you really can use these assets for real business uses.

I think some of the interesting things, and Matt started to talk about them, but that we're starting to see then, okay, if we can really protect the interest, right, through these different arrangements, as Wyoming law allows, then, well, what can we do? Well, we can tokenize real-world assets and know that they're safe. There's an organization called CityDAO that's goal is, and maybe this is overstating it, I don't know what their current mission is, but to be able to have an entire real-world town almost that's on the blockchain.

There's all sorts of lofty, comes to mind, different organizations that are now buying up real-world assets and tokenizing them, right? So I can buy 1% of a rental property or an Airbnb in Tallahassee, and I can do that immediately. I don't need to worry about title insurance and closing agents and thousands of dollars in intermediary fees that go along with typical real estate transactions. Because of the perfection and the safety I can now get on the blockchain, I can pretty safely buy that interest. I can take some right to the income, to the increase in value or whatever it might be. And I think that's one area we're going to see more and more in terms of tokenization of different assets.

Theoretically, at least, using Wyoming's LLCs or DAOs, as Tyler will talk about, you may also be able to buy that asset, again, under Wyoming law but in Tallahassee, or I don't know why I keep using that. But certainly it's going to be subject to a local jurisdiction's laws to some extent. But you put a piece of real property into an LLC or a DAO LLC and again you're under Wyoming law, you're going to have the protections and sort of the business security of using these perfection options on digital assets, understanding how Wyoming is going to deal with the digital assets, understanding you've got a jurisdiction that's going to give you a very fast turnaround through the Chancery Court.

And again, the idea has always been, I think maybe contrasting fairly or not with New York, to encourage the business transactions, right? New York has, Matt had used the word, sort of aggressive legislation and regulation. I think that's true. I think Wyoming goes the way of ensuring that you can do business, whereas the bit license I think in New York has made it very hard to do business for a lot of folks. And again, it's protective, right? It's designed to protect consumers. But I think Wyoming has recognized there are other ways to do that and to ensure business can go on.

The one other thing I think I'll talk about and then I'll turn it over to Tyler quickly is perfecting these assets and control leads into my quick side note on sort of estate planning and wealth preservation and asset protection in Wyoming and the ways we can do that. So there's been, I think unfairly in some ways, a lot of talk about "The New York Times" and maybe "The Washington Post" did some stories on Wyoming's sort of asset protection regime, right? And one, there's this idea, I think, among many that privacy equals some sort of shenanigans or impropriety. But I mean, raise your hand if you want to put in the Q&A or in the chat your net worth, right? I mean, nobody does.

And what Wyoming has allowed is some anonymity through LLCs and also an ability to domesticate assets, including digital assets here in Wyoming with a fully regulated set of trust companies or banks, and then to understand that you've got the protection of certain laws. You've got the ability to protect your own assets from potentially even future debts and things all within and we have, of course, the Uniform Fraudulent Transfers Act, but within the context of ensuring that your assets are there to be passed along to the next level, your descendants, the charities you want to provide for, whatever that might be.

So that's a whole CLE in and of itself, and I won't get too lost in that. But that is another very big part of, I think, what Wyoming has done and has done right. We actually were the first state to enact a statutory LLC, obviously with limited liability, and that's, of course, caught on in every state now. But we've always been privacy focused. I think it's part of the Wyoming sort of libertarian view of how we should allow the government to be involved in our lives. But those LLCs and now the DAO LLCs, which I'll now turn it over to Tyler on, but those have allowed folks to domesticate assets in Wyoming. The asset protection laws then as well as the digital asset laws then allow us to ensure that those assets are protected from bad actor sort of trustees because assets out here, under this asset protection and LLC structure, are going to be fully vetted, custodied, and controlled by trust companies, again, that are regulated by the Wyoming Division of Banking.

So a lot of exciting things and a lot of different ways to use Wyoming law really on the ground and practically for clients and things. And, of course, we're always happy to talk about that. That said, I almost hit my 40 minutes just right, so I will turn it over to Tyler to talk a little bit more about those arrangements, including the DAO LLC.

Tyler: Thanks, Lucas. Appreciate it. Yeah, so thanks, everyone, for your time today and joining us about talking about Wyoming laws in this space. It's exciting. I mean, just again listening even to Matt and Lucas, it always brings back so much of the work that we put in over the years to make this happen. Especially Matt, he's been integral in just bringing all this type of law to fruition in Wyoming.

And with the DAO, like Lucas said, Wyoming was the first state to create an LLC back in the '70s I believe, and now recently with the DAO. And I guess starting with what problem is Wyoming trying to solve, it really comes down to there was this paradigm shift in just the management or operations of an entity, right, a company, going from a hierarchy with centralized management to decentralized and community-driven. And there was a lot of people around the country doing that in a way that was more of a partnership, just very informal, and that created a lot of issues with respect to personal liability. So really having a pulse just on the cutting edge of things with certain types of companies and things like that, Wyoming really tried to solve that problem with finding what type of entity could a DAO fit into.

Now I'll go into a little bit of just the generalities of a DAO as my portion of the presentation. But I do want to dig in a little bit, assuming that everyone on today's presentation understands or has heard of a DAO and kind of understands the generalities. But really what kind of entity could a DAO fit in?

And so when Wyoming studied the issue, it looked at corporations obviously. That's a lot of formalities. It didn't fit. But the LLC seemed to have the right structure at least in a way, at least the foundational structure to build upon for a DAO .And so really that's how Wyoming came to be the first state to enact such laws.

I would say that we've seen a lot of folks from other states, because they're trying to broadly interpret the other states' LLC statutes to fit in a DAO, but why Wyoming? It's because we have actual laws on the books for a DAO, and I'll cite a couple of the statutes as we go through today, just to kind of give you a flavor of what it looks like when we're forming DAOs here in Wyoming and how our clients are operating those and building those companies.

So here are a couple think points. What is a DAO generally? It's community participation. That's it. You know? It's a really neat way of governance and management. And we try to do it at our firm in that way, and our clients are really open and want to embrace that community participation.

All right. So jumping back in, let's take a deep dive into some more specifics with respect to Wyoming law on DAOs. It's a supplement of the LLC statute. It's member managed. And there's default statutory rules. And this is important because as a DAO, and this is the paradigm shift in the governance and management, with the laws on the books, that provides protection to the members or that is reflected in token ownership. And so you don't really have that in any other states. So if there is an action brought let's say in Nevada or Arizona or Delaware or wherever it may be, you're not having these specific statutory dictates that you can rely on with respect to how the governance of that LLC has been managed.

So this is really important. I think that is why, hearkening back to the title of this presentation, "Why Wyoming," for DAOs, Wyoming makes so much sense because we have the actual law on the books. So let's take kind of a dive in for a sec into some statutes, and I want to just elaborate on why they're important.

If you're going to come to Wyoming and seek to form a DAO, there are some things you need to know beforehand. So within your articles of organization, you're going to need to include a public identifier of any smart contracts that are going to be directly used to manage, facilitate, or operate the DAO. And so there's got to be some planning beforehand, before someone tries to come into Wyoming and form an entity.

Usually what we see, someone wants the name of their DAO, and they don't want it to get snatched up, or they want at least get the company rolling and build a DAO from a traditional LLC. So we see a lot of clients come in and basically form just a straight LLC. And then, when they're ready and they have their smart contracts in place, at least the initial versions, then we'll amend and convert that to a DAO LLC. And so that's something that I think a lot of people overlook with respect to a DAO LLC. You need to really have some front-end planning and preparation and have that tech in place before you can form your DAO LLC. And that statute is I'm going to put it out there because we don't have it on the slide, but it's Section 17-31-108 or 106, apologies.

The next provision, the next statute is 17-31-108, which is operating agreement. And I'm going to read it really quick because it's interesting. To the extent the articles of organization or smart contract do not otherwise provide for a matter described within these statutes, the obligations, rights, and duties of the members and operation of a decentralized autonomous organization may be supplemented by an operating agreement. An operating agreement may be a smart contract.

So again, here is this paradigm shift in terms of company governance. You have the ability with a DAO to not even have an operating agreement really. Everything can be written into a smart contract. And the reason I raised that is I want to give you a peek into actual practice of when we have clients come in and they're developing really large DAOs with a large community of folks, and their members probably or membership is represented by token ownership.

In the operating agreement we found a best practice to be, yes, you can have all the protocols and the governance and everything reflected in a smart contract and really not have a written form of governance. But a lot of people don't necessarily have the ability to read code and have that high level of tech understanding. And so what we've developed in working with our clients is that, yes, let's reflect everything in an operating agreement that you're utilizing on the tech side. So usually what we're seeing is on the base layers of a company's operating system, it's going to consist of a set of smart contracts deployed usually on the Ethereum blockchain, that's at least what we've seen, usually that define the basic building blocks and standard components that can be used to implement the company's like token network. The token network basically evidencing the token holders who that's the members of the company.

So usually you're going to see the layers be on Etherscan. You're going to have a contract address, right, and for the smart the public identifier. Proposals and voting, that could be on a snapshot. A deployment transaction, that could be on Etherscan as well. And then you have GitHub links as well, that like Lucas had mentioned earlier.

But the company's distributed ledger will usually consist what we've seen on the public Ethereum blockchain, to which anyone can really read or write data. But there are some certain restrictions that you can put into place for your company or for your clients that are set forth in the smart contracts. And the company's protocols can limit write permissions for certain functionality to certain token holders, cryptographic addresses.

So there's a lot of ways that you can provide governance, but I think the moral is however it's built out in these smart contracts and protocols, you really do want that reflected in an actual central document that can be on open source for everyone to read and understand. And I think we incorporate that into the operating agreement itself. And so that's something that I think we're on the really forefront of, and I think it works a lot. We have several clients now not even in the nascent stage. I think they're even more than their adolescence. They're full grown, and they have community members all over the country, all over the world, and there's lots of them, and now they have organization, subcommittees where they have a group that works on governance, and we work with that committee. Our privilege applies to, obviously, all the owners of the company or all the members, but we limit our communications to certain subcommittees because of just the amount of people that are involved in these DAOs.

And then another statute that I want to touch upon is the management. So 17 13 109 is the statute you're going to want to look at here in Wyoming. Management of a DAO shall be vested in its members or the members and any applicable smart contracts. All smart contracts utilized by a DAO shall be capable of being updated, modified, or otherwise upgraded.

I want to point this out for a second because it's something that Lucas alluded to during his presentation with respect to like it was the how we test. But a DAO necessarily has to be managed by its members, like the community. You can swap in members versus token holders. You can define that in your operating agreement. They are the owners of the company. They make the decisions of the company in a community way.

And one thing that is important about that is if you hearken back to the Howey Test, however antiquated that may be, it's still applied in some ways, even though I don't think it really is congruent with this space and how companies are run and the issuance of tokens simply for reflecting membership interests. But one of the prongs, as I'm sure you all know, is that an investment contract exists if there's an investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others, highlighting the efforts of others.

And so if you have a community-driven organization, let's say a company issues tokens, but those tokens are only reflecting the ownership of the company, but everyone involved is an active participant, they're actively managing the company, they're actively making those decisions together collectively, well, then I think that really you have a firm argument to say, well, we're not expecting profits to be derived from the efforts of others. We're all on this together. We're all working. We're all active participants.

So anyhow, that's something I really did want to note for everyone and really take a deep dive into the details. So I know that we have 53 minutes, but we do have some questions. So I'm going to stop there. There's so much more we could talk about. And if anyone has any questions, please reach out to Lucas, Matt, or myself on any of this, and we'd happy to chat even further. We do have some questions, but I am going to turn it back over to Matt I believe, and he can wrap this up and then we can answer some questions. There are some really good questions out there with respect to the Chancery Court and some DAO structure. So Matt, take it away from here.

Matt: Yeah. Thanks, Tyler. So this one I think we've kind of covered already. We just kind of wanted to and I know we've been throwing a lot of things really quickly at a super high level and kind of going over them really quickly, but I think we really wanted to drive home more than anything, in light of just what's going on in the world, at least in the legal world with respect to digital assets, kind of where Wyoming's legal posture has been with respect to digital asset statutes and rules that address things like custody, commercial law amendments, and then the SPDIs.

Just getting back to something, I want to really hammer home something that Lucas covered. And we, as a firm, I think believe that this is like maybe the most misunderstood and underrated law in the country right now on digital asset law, and that is that Wyoming actually created this lien cleansing mechanism as an addendum to our UCC.

So if you custody digital assets in Wyoming and obviously custodying digital assets is a bit of a facts and circumstances test, but if you custody those digital assets in Wyoming for two years, and there's conditions on that, like not having actual notice of a prior lien, etc., that you take those digital assets free of any prior lien claims. And when you layer rights like that at a state level, and I've dealt with a lot of counsel from large firms that are doing some of the big digital asset bankruptcies and things, and we all know that obviously federal bankruptcy law is one thing, right, but defining either the contractual or maybe trust relationship with a party might come down to a matter of state law. Some of these state rules become really, really important to understand. And if you are dealing in digital assets, I think it's imperative that practitioners understand where the most beneficial places are in the country where the holders of those assets or the users of those assets are going to have the most clarity, from a legal treatment perspective.

So I just wanted to really highlight that lien cleansing provision, and also I wanted to kind of go back to the commercial law amendments. And it's so funny, because Tyler alluded to it, I was appointed by the Wyoming governor to sit on one of our legislative task forces that works on these laws. And I can actually remember, when we were getting ready to append our UCC with some of these things, representatives of the Uniform Law Commission coming to our legislative hearings here in Wyoming basically begging us not to do it for fear that it was going to be a disaster and a bad idea. Fast-forward five years and now they're adopting our language. And obviously, there are some updates and modifications to it, but it's been a huge I think relief maybe for us as practitioners to see that some of these cutting edge things that Wyoming has done are finally percolating and making their way through sort of larger acceptance.

And as I mentioned at the outset, I mean, even some of the federal bills, if you follow this at a federal level at all, you're probably familiar with the Lummis-Gillibrand bill. Senator Lummis from here in Wyoming and Senator Gillibrand from New York have co-sponsored a piece of legislation which hasn't gone really anywhere yet, but it's one of the most comprehensive bills that's been proposed in Congress to kind of, again, clarify the treatment of some of these digital assets. And again, what encourages us in Wyoming is the underpinnings of that bill in terms of definitional framework around digital assets is completely an adoption of what Wyoming has done. So we're encouraged to see that there's at least some acknowledgement that maybe we're on the right track, even though it's still a very shattered legal framework for a lot of states and at the federal level as well.

And maybe lastly, we just wanted to kind of touch on some things and some themes that we're seeing in terms of where this is going in the future. Again Lucas and Tyler both alluded to this, but we're sort of enamored with people's take on estate planning. Obviously, Wyoming is a popular place for trust situs and estate holdings and privacy anyways. But when you layer on top of that estate planning considerations and things like the use of the DAO that Tyler was just talking about, we've had clients that are exploring utilizing a DAO LLC structure with smart contracts to regulate sort of a family digital asset treasury, right, where you could put on a smart contract timeline distributions to be automated over time under a particular trust agreement. So I mean these are things that are brand new again and are just being explored, but we're very bullish on some of these concepts and the level of excitement we see.

Some of the new securities laws considerations, obviously everybody in the crypto world is following closely the SEC and enforcement actions and just sort of the need for clarity at the federal level of how some of these digital assets are going to be classified and treated. But again, I think we've hopefully given you a flavor that, at least from our perspective, we've seen a lot of work being done on sort of segregating these buckets of digital assets and, like Lucas alluded to, things like the utility or consumptive tokens versus the stable tokens versus, right, the payment networks or things that are more designed to be commodity like or store value.

So I think it's taken a while for the industry to mature and for the legal regulatory framework to catch up, but it's nice to see it's getting there.