DAOs, a new form of the online decentralized organization, have shown massive growth over the past two years, with more than 10,000 DAOs and billions of crypto assets held in DAO treasuries. They are increasingly important in the context of crypto-token networks, and many DAOs hold significant assets, but their legal and regulatory status is unclear.
There are many uncertainties around DAOs, including:
- What is a DAO from a legal perspective? Is it, or should it be, regarded as a legal entity like a company or partnership, or is it a completely new type of legal entity?
- Should a DAO have a separate legal personality? How could contracts or other liabilities be enforced against it in practice (and in which jurisdiction)?
- How decentralized does a DAO have to be?
- Who is liable if something goes wrong? Does liability rest with the members, the founders, the developers, or the DAO?
- How do money laundering, reporting, and other regulatory concepts apply to DAOs, and who is liable for taxes?
DAOs represent a revolutionary new way of doing business, with an ethos of transparency and democracy. Their growth has attracted the attention of policy makers, regulators, and the mainstream financial sector, whose reactions will shape the DAO evolution. This article is written from a global perspective, as it is the global policy-making bodies that aim to set the international standards being implemented nationally.
GOODBYE TO TRADITIONAL LEGAL STRUCTURES?
DAOs do not have a traditional legal structure. A DAO is generally set up by individual members coming together with the aim of raising money and carrying out projects in the crypto or real world and agreeing on the rules of the DAO. These rules are recorded in smart contracts, created by coding, typically based on a decentralized protocol like Ethereum.
The smart contracts autonomously execute the process of the DAO's governance and/or its commercial activities to the extent they are programmed to do so (upon the triggering of specific coded preconditions). There is no need for lawyers to draft agreements or constitutional documents for the DAO, no need to register with corporate registrars, and no need for banks to transfer funds.
Members can send cryptocurrency to a DAO's treasury on the blockchain in exchange for tokens. These are often governance tokens, which carry voting rights. Governance tokens may also be distributed by way of airdrops or as rewards (e.g., to developers or others who contribute to the DAO).
In addition to providing voting rights, governance tokens are often traded in the secondary market on centralized and decentralized exchanges. In many cases, the valuation of these tokens has skyrocketed due to demand. Although tokens are not equity interests, members may aim to profit from an increase in the value of their tokens or through profit distributions to members.
First published in Amplify (November 2022). Amplify is published monthly by Cutter Consortium, an Arthur D. Little community.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
