BY: Marina Phillips, RBFL Editor
Decentralized Autonomous Organizations (“DAOs”) are becoming an increasingly popular means of organizing people from around the world for a common purpose. For those who are unfamiliar with the term, DAOs are essentially organizations or entities formed in blockchain and can be formed for both for-profit or not-for-profit purposes. DAOs are governed by smart contracts which are self-executing codes written into the blockchain where the DAO is formed and which represent the operating agreement between the members of the DAO. Once the members agree on how the DAO will operate, the smart contract executes the governance actions coded within it automatically. One reason DAOs have increased exponentially in popularity is the decentralized nature of the entity. This essentially contributes to more transparency and collaboration among members. Without a central governing group like those in traditional organizational entities, the members collectively make governance decisions so that they all can benefit as a group and individually. However, DAOs come with many questions about liability and who bears the responsibility should something go wrong, taxes, and regulations.
As DAOs become a go-to organizational structure for many, legislatures and regulatory agencies around the world are scrambling to figure out how to bring legal certainty to DAOs and their members. Outside of the U.S., countries like Switzerland, the Cayman Islands, Bulgaria, and Malta are passing their own DAO-friendly legislation that encourages DAOs to form in their respective countries. Malta stands out in particular due to its unique approach in creating a new type of business entity called a “Technology Arrangement” that operates similarly to a limited company in Malta. Additionally, Malta has created a new agency, the Digital Innovation Authority, to specifically regulate blockchain businesses. This novel approach does not try to fit DAOs into existing legal frameworks but instead considers the unique features of DAOs that don’t necessarily correlate with traditional entities. By creating a new regulatory agency to focus exclusively on blockchain businesses and organizations, Malta is setting itself up to better adjust to new innovations and pass regulations that fit not only DAOs but any new blockchain businesses that may evolve in the future.
In the U.S., Wyoming became the first state to pass legislation designating legal entity status to DAOs by creating a DAO LLC statute. Many states are following in Wyoming’s footsteps and passing statutes of their own that would give LLC status to DAOs. However, by trying to fit a DAO into an LLC framework, states are ignoring the unique features of DAOs like decentralization and anonymity of members that give rise to issues not contemplated by traditional statutes. Instead, states should focus on creating task forces, departments, or agencies that specifically focus on blockchain organizations and can suggest ways to tweak the existing entity structures to better fit the make-up of a DAO while also bringing it within a legal framework where states can better protect the members of DAOs from liability. In giving DAOs a way to form as a legal entity and creating regulations that are DAO-friendly, legislatures can establish hubs for technological innovation within their states that will bolster that state’s economy overall.
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