What’s a DAO?
DAO is an acronym for Decentralized Autonomous Organization. It is associated with the emergence of blockchain technology; the term was first mentioned in 2015 by the Ethereum community, and in 2016 the first such organization was formed as a crowdfunding platform through which members raised funds for various projects.
DAO can simply be defined as a group of people joining together for a common goal. The difference compared to traditional types of organizations is that DAO has no hierarchy; there is no central body such as a board of directors or executive director. Instead, rules are implemented through smart contracts using blockchain technology.
How does it differ from traditional legal entities?
However, some characteristics of such an organization have similarities with traditional forms of corporations as we know them; for example, member participation or voting is based on token ownership – similar to how shareholders of a joint stock company own shares. DAO has predefined rules in the code of smart contracts, just as a joint stock company has a memorandum of association (in addition to articles of incorporation) or a limited liability company has articles of incorporation.
Key characteristics of such an organization are transparency and decentralization, and it is precisely in this aspect that we see a different form of organization. Basing the entire organizational structure on blockchain technology and smart contracts means that the rules are known to everyone and permanently recorded on the network, and the decision-making process is accessible to all members who own tokens, with each decision also being permanently recorded. DAO represents a transparent and automated form of organization in which members only need to rely on the smart contract code and blockchain technology.
What are the risks?
DAO knows no boundaries; people from all over the world can participate in such an organization and contribute to a common goal. Since DAO, so to speak, transcends many jurisdictions, it has become clear that a legal solution must be found to regulate such an organization.
One of the main risks linked to unregulated DAOs is associated with liability. For example, in the bZx case, a federal judge in California in 2023 denied a series of motions attempting to excuse DAO members from liability in a class action lawsuit filed against the DAO. This decision means that simply owning a token is able to create liability for token holders. If a jurisdiction considers that a DAO has general partnership status, owning a token could make holders personally liable. While the ruling is not yet definite, it shook the crypto community.
A determined legal structure is important in the aspect of tax and compliance liability as well. In case a non-regulated DAO failed to meet tax and other compliance obligations, members could face liability risks.
If a certain jurisdiction considers the DAO’s native token a security, securities laws come into play as well; in addition, to anti-money laundering when raising capital due to the anonymity of members and the fact that they can reside anywhere in the world.
Does Serbia regulate DAOs?
Our country, like many others, has not regulated DAOs, meaning DAOs do not have legal personality under our law. If we were to fit DAO into one of the existing forms, we would encounter many questions. Some opinions suggest that DAO and its main characteristics could potentially fit into the form of a civil partnership or a partnership agreement, which is defined as an agreement by which two or more parties commit to pooling certain resources or labor for the purpose of mutual benefit.
As we mentioned earlier in the text, it is not sufficient to fit DAO into the most similar existing legal form without addressing issues such as unlimited liability of members; there is no simple answer to this question.
The legal standing of DAOs – solutions by different countries
Some countries have found ways to incorporate DAO into their legal systems. Let’s check them out.
United States – Vermont, Wyoming, Tennessee & Colorado
Back in 2018, Vermont enacted a piece of legislation establishing blockchain-based limited liability companies or BBLLCs. Vermont’s law doesn’t specifically talk about DAOs but it applies to companies that utilize blockchain technology for a material portion of its business activities. To be able to incorporate a BBLLC and its provided limited liability, you must provide certain information such as a description of the company’s purpose, level of decentralization, security-breach mitigation protocols, voting and governance procedures and so on.
Following Vermont’s new law, Wyoming passed a law that enables the incorporation of DAOs as limited liability companies as well. The law defined DAO as a limited liability company whose articles of organization include a statement that the company is a DAO. It can be member-managed or algorithmic-managed. There are a few requirements though such as that a DAO LLC must appoint a registered agent in Wyoming and that the articles of organization must include the smart contract which must be amended when the smart contract changes, along with a presumption that a DAO LLC is member-managed unless the articles of organization say otherwise.
Tennessee amended its Limited Liability Act and added decentralized organizations (DOs). Therefore, in Tennessee DAOs are called DOs and the legal solution is similar to Wyoming’s law.
On the other hand, Colorado introduced a legal entity form known as Limited Cooperative Association (LCA) and defined as an autonomous, unincorporated associations of persons united to meet their mutual interests through a jointly owned enterprise primarily controlled by those persons. In simple terms, you can think of it as a mix of a joint stock company and a limited liability company which can have two types of members – those that conduct business and those that make contributions.
Switzerland
Switzerland didn’t introduce a special legal status for DAOs, but is considered as an attractive location from the aspect of blockchain technology as several DAO projects, such as the Ethereum Foundation, have chosen Switzerland for their headquarters.
Long story short, available legal forms under the Swiss law to incorporate a DAO are the association and the foundation.
Association can be defined as an union of several persons who join together to achieve a common purpose. According to the Swiss Civil Code, the liability of persons is limited since the association is liable with its assets. An association consists of a general assembly, the governing body that includes all members, and a board, which is appointed by the general assembly. However, an association cannot be incorporate for any purpose, yet only to pursue non-commercial purposes.
The second option is a foundation which includes limited liability for users. It must include a specific purpose, but that purpose doesn’t have to be strictly non-commercial. The declared purpose can be changed only to a limited extent.
Malta
Malta outlined its legal solution for incorporating DAOs in its Innovative Technology Arrangements and Services Act (ITAS). Anyone who aims to acquire recognition for an innovative technology arrangements (such as a DAO), needs to apply to the Malta Digital Innovation Authority (MDIA) and provide all required information.
For example, specific requirements include a DAO being suitable for the declared purposes and possessing the needed features. The DAO’s underlying software must be reviewed by a registered auditor which is not associated with DAO’s owners or operators.
Malta’s legislation introduces strict standards regarding compliance, transparency, accountability and security, along with audit obligations to verify that a DAO adheres to prescribed standards.
Marshall Islands
This country recognized DAOs as legal entities back in February 2022. The law laid down that DAOs don’t need a board of directors nor written or paper records if they were accessible on blockchain; the law also enabled every member of the DAO to remain anonymous except for one person. However, the person that is not anonymous wouldn’t need to be physically present in the Marshall Islands.
Please note that this piece does not offer legal advice but rather represents the author’s standpoint.
