• Rza Mustafayev

Establishing a DAO?

As it has always been technology tends to leave legal progress behind. The concept of decentralized autonomous organizations (DAOs) has brought about a range of questions for corporate law that need to be addressed in most jurisdictions.


A DAO is a community-led entity without central authority, where members own tokens for collective decision-making and management. DAOs are intended to bring trust, active involvement of stakeholders, transparency and speed.


DAOs are mainly not recognized as legal entities in most jurisdictions and are merely regarded as a technological innovation. Due to the fact that many jurisdictions do not define these as entities there is much unclarity in their classification. Oftentimes a DAO can be seen as a mental concept merely for its participants as a group of coordinating individuals or a cooperative. Unclarity of legal consequences limits their usability and functionality such as liability of members, interaction with government authorities and business partners.


Failure to be recognized as a legal entity means that DAOs lack the core component of standard business entities - limited liability of its members (either founders or shareholders). Furthermore, DAOs may be considered under the respective national regulation as general partnerships which might be undesirable due to the legal consequence that each individual who is a member is considered as a partner of the partnership and would be held jointly and severally liable for all liabilities of the DAO [1].


Existing DAOs usually rely on traditional legal forms and regulations applicable to these to operate. It is the case with LAO investment fund which is registered as a Delaware limited liability company [2] or Constitution DAO and Flaming DAO which employed LLCs to act on behalf of them [3]. Nevertheless, a few jurisdictions have drafted bespoke or semi-bespoke regulation for the industry.


The following is the list of recent developments in various countries where DAOs are established either by creating a bespoke legal entity or using existing legal structures.

Country

Legal Structure

Examples

Wyoming, USA introduced bespoke regulation for DAOs in 2021. [4]

Wyoming limited liability company (LLC)

1. American CryptoFed DAO

2. Citydao

3. Blocks DAO, LLC

In Tennessee, USA, a bill was signed in 2022 allowing decentralized DAOs, to register as a type of LLC. [5]

Tennessee limited liability company (LLC)

Vermont, USA was one of the pioneers [6]

Blockchain-based Limited Liability Companies

1. dOrg

Marshall Islands became first sovereign country in the world allowing registration of DAOs[7]

Non-Profit Entity

1. Admiralty LLC

Switzerland:Swiss Civil Code allows to create an entity without registration in registry if no business purpose is pursued, which is suitable for some DAOs. [8]

Swiss Association ("Verein")

Despite these attempts, there is still a plethora of legal uncertainties around DAOs and whether they actually are able to address any of the concerns that they were invented to resolve. As a conclusion we are happy to see this concept gaining more traction and interest outside the technical space and hope new innovative regulatory insights will be introduced in competing jurisdictions.




[1] DAO Legal Discussion | NEAR Wiki

[2] What is the LAO? | 👾 The LAO - FAQs

[3] Is a DAO + LLC Still a DAO? (coindesk.com)

[4] https://frostbrowntodd.com/wyoming-paves-way-for-dao-legal-company-status/

[5] Tennessee's DAO Statute: A Trendsetter For Blockchain-Based Corporate Governance | Baker Donelson

[6] How can a decentralized autonomous organization (DAO) be legally structured? (lrz.legal)

[7] https://www.globenewswire.com/news-release/2022/02/15/2385589/0/en/The-Republic-of-the-Marshall-Islands-Formally-Recognizes-DAO-Incorporation.html

[8] https://wiki.near.org/governance/dao-legal-discussion

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