Legal Decentralized Autonomous Organizations

The SEC chairman recently said, “I suggested that platforms and projects come and talk to us. Many platforms have dozens or hundreds of tokens on them. Although the legal status of each token depends on its own facts and circumstances, the probability that with 50, 100 or 1,000 tokens, a particular platform has no collateral is quite low. Make no mistake: to the extent that securities are on these trading platforms, our laws require them to register with the Commission, unless they qualify for an exemption. 8 An interesting and thoughtful white paper titled “A Legal Framework for Decentralized Autonomous Organizations” was co-authored by a general counsel from one of the largest venture capitalists in the blockchain space and proposed a framework for DAOs within the legal system in the United States. A decentralized autonomous organization, or “DAO,” is an “organization” coded as a computer program that is transparent and controlled by the organization`s members rather than a central business entity. Currently, many ADOs are not established as legal entities, potentially exposing their members to a range of risks and liabilities. Essentially, DAOs allow groups of participants to create organizational forms beyond the top-down hierarchy of the company that must meet the needs of a board of directors and shareholders. ADOs essentially eliminate or minimize the roles of leaders and managers in the organization and instead rely on transparent rules that apply to all members and participants. As an emerging technology, DAOs are rapidly growing in the Ethereum blockchain ecosystem, experimenting, using, building, and iterating with them in real time. There are many unresolved issues with ADOs, particularly in terms of regulatory compliance, benefits, recruitment, talent retention, revenue volatility, and governance.

Whatever the current problems, DAOs have the potential to enable groups to solve problems, coordinate and execute ideas in ways that are increasingly necessary to solve the deep-rooted problems of the 21st century. Before we get into the technical aspects and legal requirements, let`s first discuss how CAD represents a new type of organization. A decentralized autonomous organization (DAO), sometimes called a decentralized autonomous organization (DAC),[a] is an organization built according to coded rules like a computer program, which is often transparent, controlled by the members of the organization, and not influenced by a central government. In general, DAO communities are owned by members without centralized leadership. [1] [2] A DAO`s financial transaction records and program rules are kept on a blockchain. [3] [4] [5] The exact legal status of this type of business organization is unclear. [6] As more people and money flock to SACs, it will be important to clarify open questions about the legal rights and obligations of these entities. In July 2021, Wyoming became the first state to enact laws explicitly allowing the formation of DAOs.11 The law is an addition to the existing LLC law, which was notably the first in the country. The law allows DAOs to be incorporated as limited liability companies, giving these companies legal status and identity for the first time in the United States. Decentralizing their operations allows companies to offer a number of benefits to their members, including increased transparency, security, and privacy. Since ADOs are not traditional organizations, they do not fit seamlessly into existing legal frameworks, so it is not clear how ADOs are treated in contract law. At the very least, smart contracts will likely need to incorporate some aspects of this list into the code to become more acceptable and useful to businesses and individuals who want to use these new technologies seamlessly.

It is important for regulators to protect investors and consumers, but it is also important to give choice to small businesses, the poor, people who do not have access to banking services, and anyone who simply cannot meet the existing requirements of the centralized system. Balancing these competing values will be the real challenge in realizing the promise of DeFi and the crypto industry.10 One of the most promising benefits of DAOs is the low barrier to entry for individuals and small businesses that otherwise do not participate in the stock market, banking, and lending. or do not make their services or goods available to wider markets. The possibility of greater involvement and grouping of like-minded people to carry out projects for the common good of the group is something new and inherently more democratic than most existing organizations. It should be noted that since DAOs are decentralized, it can be difficult for governments to enforce these intellectual property rights, which could result in a loss of revenue for governments and the resulting regulation or suppression of DAOs. Vitalik Buterin suggested that once launched, a CAD could be organized to work without human management interactivity, provided smart contracts are supported by a full Turing platform. Ethereum, which is blockchain-based and launched in 2015, has been described as reaching this Holding threshold, thus enabling such DAOs. [3] [10] [11] Decentralized autonomous organizations aim to be open platforms through which individuals control their identity and personal data. [12] If someone wants to sue an OAC, who does they go to? Where is a DAO that is decentralized and exists exclusively on a blockchain with potentially thousands of members around the world residing around? Are SAC members personally responsible for the responsibilities of a DAO? How does a DAO enter into a legally binding contract? With Sotheby`s hammer falling on Thursday night, ConstitutionDAO narrowly missed its bid to buy one of the last remaining copies of the U.S.

Constitution. It is one of two remaining specimens still in private possession of the 13 extant specimens. Although they were auctioned off, this is a monumental moment in the recognition of decentralized autonomous organizations (DAOs) that raises awareness of a system that will transform the legal industry. These organizations facilitate the trading of cryptocurrencies and other digital assets without the need for a central authority. Instead, direct peer-to-peer transactions are made between two parties using smart contracts. But as CAOs become more important by funding projects, investing in companies, and employing people or organizations, some mundane but vital questions need to be addressed. These organizations are powered by smart contracts on a blockchain network like Ethereum. They are autonomous in the sense that they govern themselves and exist outside the traditional legal framework. What do these features mean? That DAOs have the potential to radically change the way we do business. Could decentralized autonomous organizations (DAOs) become the model for future corporate structures, transforming the legal industry? What are some recent examples of SACs? Currently active DAOs include MakerDAO, MolochDAO, BanklessDAO, Raid Guild, and MetaFactory.

These DAOs all have different goals, from issuing funds against crypto collateral, applying for funding grants for various projects (MolochDAO), a collective of guilds on which members vote to decide on different goals (BanklessDAO), collective development projects (RaidGuild) and organizing around the fashion and culture that creative members produce (MetaFactory). This is just a small snapshot of the DAOs, and many more are created on a day-to-day basis. Another important point is that while many DAOs are for-profit organizations, they can also be created as non-profit organizations to raise capital and fund specific projects (environmental, social, social, etc.) based on member votes. DAOs allow the coordination of capital and human effort of thousands of people potentially interested in DAOs. However, when the first DAOs were formed without a legal form or formal state recognition, token holders began to fear being subject to unlimited personal liability for DAO actions. The white paper highlights some of the key legal issues facing DAOs, including tax reporting difficulties, difficulties in entering into contracts, and the potential additional liability of DAO participants. The white paper suggests that an ideal solution will involve new laws that recognize a type of non-entity that could at least have sufficient legal personality to provide some protection for these concerns. Another example of a rapidly developing DAO is Bankless DAO, which was founded as a decentralized community to “help the world go bankless.” The DAO aims to achieve this goal by forming a decentralized community to coordinate and “disseminate media, culture and education without a bank. The goal is to promote acceptance and awareness of truly bankless monetary systems such as Ethereum, DeFi and Bitcoin. He does this through the collective participation of his community. 6 A native governance token allows members to vote on proposals for the DAO and funds a community treasury to pursue the goals of the bankless DAO.