Rich by Coin

Banks are beginning to engage with decentralized finance. But until lawmakers create a foundation for allowing legally recognized entities like LLCs and nonprofits to govern these networks, adoption will be incomplete. New market structure legislation, such as the CLARITY Act and RFIA, can provide the certainty banks need by ensuring legal structures (like LLCs or nonprofits) can be used for the decentralized governance of these networks.

For a bank’s compliance and legal teams, engaging with a blockchain network run by unknown actors in unknown jurisdictions is difficult if not impossible. Legal entities provide the two-part answer banks need: a clear, identifiable entity for due diligence, and a vehicle through which governance can be coordinated, satisfying AML and risk assessment procedures. Banks rigorously vet key software providers, but network protocols operated by a loose coalition of unknown actors make this process extremely difficult in the blockchain context. Banks will want a seat at the table to vote on standards, security upgrades, and operational rules, which requires a defined entity to participate in governance.

State-level efforts, like Wyoming’s Decentralized Unincorporated Nonprofit Association (DUNA) Act and similar statutes in Vermont, Tennessee, and Utah, are steps in the right direction but are insufficient. They do not fully address broader federal legal uncertainties, especially around securities laws, and create a compliance patchwork that is unworkable for national and regional financial institutions. The CLARITY Act and RFIA, along with draft market structure legislation proposed by the Senate Agriculture Committee, would establish that these foundational legal entities can coexist with decentralized governance, allowing banks to identify a governing entity and participate in governance without exposing balance sheets to unknown liabilities. With such guidance, regulators can provide clearer direction, and compliance teams can apply established AML and risk procedures to support safe innovation.