Should Crypto Kill Foundations? The Legal Structure Revolution Dividing the Industry

A16z's Miles Jennings argues for abandoning offshore foundations in favor of US-based structures, sparking heated debate about crypto's corporate governance future.

Key Takeaways

• Current foundation model requires setting up offshore entities with foreign directors, creating coordination nightmares and inefficiencies
• The new regulatory environment under the Trump administration may eliminate the need for complex foundation structures
• Wyoming's DUNA (Decentralized Unincorporated Nonprofit Association) offers a potential US-based alternative to Cayman foundations
• Foundation coups and director conflicts have plagued numerous crypto projects, validating concerns about the current system
• Market structure bills propose decentralization tests based on control markers rather than corporate structuring
• Industry veterans remain skeptical of untested alternatives despite acknowledging foundation model problems
• The debate reflects broader tensions between innovation and proven legal frameworks in crypto governance

The Foundation Model's Fundamental Flaws

The current crypto industry standard involves a complex dual-entity structure that creates more problems than it solves. Projects typically incorporate a for-profit development company in their home jurisdiction while establishing a separate nonprofit foundation in tax havens like the Cayman Islands or Panama to handle token issuance and distribution.

• Development companies hire engineers and build products while foundations control token economics and community initiatives
• Foreign directors with no connection to the project's vision often control foundation decisions, creating misaligned incentives
• Coordination between entities becomes a bureaucratic nightmare, slowing development and creating internal conflicts
• Professional directors in tax havens prioritize risk management over innovation, leading to conservative decision-making that stifles growth
• The regulatory benefits that originally justified this structure have largely failed to materialize in practice

This arrangement emerged as a defensive response to uncertain US regulations, but the costs have become increasingly apparent as projects mature and scale. The inefficiencies compound over time, creating structural impediments to effective governance and rapid iteration.

Famous Foundation Failures

The crypto industry has witnessed numerous high-profile conflicts between development teams and their foundations, demonstrating the structural problems inherent in the current model. These disputes often result in costly legal battles and project delays that harm both development progress and community confidence.

• Foundation coups have occurred where offshore directors attempt to redirect funds or change project direction against founder wishes
• Professional directors often lack technical understanding, making decisions that conflict with engineering realities and user needs
• Risk-averse foundation management frequently blocks innovative features or partnerships that development teams consider essential
• Communication gaps between jurisdictions create delays in critical decisions, especially during market stress or competitive pressure
• The separation of technical development from token economics creates misaligned incentives across different aspects of the same project

These failures highlight how the foundation model, designed to provide legal protection, often creates operational risks that outweigh the theoretical benefits. The most successful crypto projects tend to have strong informal coordination despite formal structural separation.

The Wyoming DUNA Alternative

Wyoming's Decentralized Unincorporated Nonprofit Association represents the first serious attempt to create a US-based legal structure specifically designed for decentralized organizations. This framework promises to eliminate many foundation model problems while maintaining necessary legal protections.

• DUNAs allow token holders to directly participate in governance without requiring offshore corporate structures
• The Wyoming framework provides legal recognition for decentralized decision-making processes and smart contract execution
• Tax treatment remains favorable while eliminating the complexity of international coordination between multiple entities
• Regulatory compliance becomes more straightforward when operating within a single US jurisdiction with established legal precedents
• The structure scales more effectively as projects grow, avoiding the bureaucratic overhead that foundations accumulate over time

However, the DUNA model remains largely untested at scale, raising questions about its practical effectiveness compared to the known quantities of traditional corporate structures.

The Battle-Tested Myth

Critics argue that the foundation model's reputation for being "battle-tested" reflects more marketing than reality. Most crypto projects have never faced serious legal challenges that would validate their structural choices, making claims about proven effectiveness premature.

• No major crypto foundation has successfully defended against comprehensive tax investigations or regulatory enforcement actions
• Securities law protection has failed consistently, with foundation structures providing little defense against SEC enforcement
• The perceived benefits often stem from jurisdictional advantages rather than structural superiority of the foundation model itself
• Many legal victories attributed to foundation structures could likely have been achieved through simpler corporate arrangements
• The industry's defensive crouch has prevented honest assessment of whether complex structures actually provide meaningful protection

This analysis suggests that crypto projects may be paying substantial ongoing costs for theoretical benefits that haven't materialized in practice, making alternative approaches worth serious consideration.

Industry Resistance to Change

The venture capital and legal communities show significant resistance to abandoning foundation structures, reflecting both legitimate concerns about untested alternatives and natural conservatism around legal frameworks that represent significant investments.

• Lawyers who have built practices around foundation structures have professional incentives to maintain the status quo
• Venture investors prefer familiar legal frameworks that have established precedents for exit scenarios and governance rights
• The chicken-and-egg problem prevents widespread adoption since no major projects have successfully demonstrated alternative approaches
• Risk-averse institutional participants prefer known problems to unknown solutions, even when current problems are substantial
• Network effects in legal and venture communities make coordination difficult without clear economic incentives to change

These dynamics create powerful inertia that favors existing structures regardless of their effectiveness, requiring either regulatory pressure or compelling economic advantages to drive adoption of alternatives.

The New Regulatory Reality

The changing regulatory environment under the Trump administration creates new opportunities for US-based crypto projects to operate without complex offshore structures. Proposed market structure legislation focuses on decentralization markers rather than corporate formation details.

• Decentralization tests based on control distribution rather than foundation structures could eliminate the primary justification for offshore entities
• Clear regulatory frameworks for token projects operating within US jurisdiction would reduce the need for regulatory arbitrage
• Enforcement priorities shifting away from broad-based crypto crackdowns create space for innovative legal structures to develop
• Congressional support for crypto-friendly legislation provides political cover for projects adopting new legal frameworks
• The timing aligns with industry maturation, making structural experimentation more feasible than during earlier uncertain periods

This regulatory shift represents the first real opportunity since the ICO era for crypto projects to optimize their legal structures for efficiency rather than defensive positioning.

The Path Forward

Moving beyond foundations requires both regulatory clarity and practical demonstration of alternative structures' effectiveness. The transition will likely happen gradually as new projects adopt innovative structures while existing projects remain locked into their current arrangements.

• Early adopters of DUNA or similar structures will provide crucial data about practical effectiveness and unexpected challenges
• Regulatory guidance on decentralization tests will clarify which structural elements actually matter for compliance purposes
• Venture capital acceptance of new structures depends on demonstrated success and clear exit pathways for investors
• Legal precedents need to develop around innovative structures before they can become mainstream adoption candidates
• Industry coordination may be necessary to overcome network effects that favor existing foundation models

The debate ultimately reflects crypto's ongoing maturation from an experimental technology to a mainstream financial infrastructure. As the industry develops, legal structures must evolve to support efficient governance and rapid innovation rather than simply providing defensive positioning against regulatory uncertainty.

The foundation era served its purpose during crypto's uncertain regulatory period, but maintaining complex offshore structures in a more favorable legal environment may create unnecessary friction that hampers innovation. Whether DUNAs or other alternatives prove superior remains to be seen, but the conversation itself signals healthy evolution toward more efficient governance models that align legal structures with operational realities.