DAO Law
Research
Via [1]
Joni Pirovich, Primavera De Filippi, editors:
Overview of Research Areas
Law
Contributors: Joni Pirovich (Blockchain & Digital Assets Pty Ltd), Chris Wray, Morshed Mannan (European University Institute), Primavera de Filippi (Harvard / CNRS), Silke Noa Elrifai (CERSA, Paris II), Tara Merk (CNRS, Metagov)
"As novel mechanisms for organizing and governing, DAOs raise a host of legal issues and risks. Given the scope of existing legal rules, DAO practitioners have repeatedly highlighted the need for greater legal certainty (Ghavi et al., 2022), particularly concerning the sharing of ownership or rights to govern in DAOs with tokens (Wigginton et al., 2023). This includes legal certainty on liability issues for DAO members and contributors (Farmer et al., 2022), as well as potential liability for the organization itself, including when the DAO has been incorporated or formed as a legal entity distinct from its members (Jennings & Kerr, 2022). More legal certainty has also been demanded for structuring the interaction between DAOs and traditional entities, particularly non-Web3 native organizations, including in relation to the ownership of traditional physical assets (e.g. real estate or land) (Ruane & McAfee, 2022) and the engagement of contributors (Ilyushina & Macdonald, 2022). Furthermore, DAO practitioners are curious to better understand the regulatory landscape and where the application of existing law should be clarified versus reformed in order to formulate clearer policy demands. Lastly, many practitioners are interested in exploring whether and how legal tools can improve governance structures and accountability within DAOs (A. Murray et al., 2021).
Legal definition
Summary: Legal jurisdictions have a hard time classifying DAOs using existing entity types. Legal research can contribute insights as to where existing legal frameworks can be applied to DAOs and when new regulatory approaches are required.
DAOs currently face many open problems that could benefit from increased attention from the legal community. On the one hand, some legal scholars question the feasibility of DAOs being alternatives to the traditional corporation (Low et al., 2022). On the other hand, other scholars observe that while existing laws are well-equipped to address certain challenges presented by DAOs, there are socio-technical features of DAOs (e.g., fluid transnational membership, pseudonymous contributions) and the open-source protocols they govern (e.g. what smart contract parameters are subject to governance) that ‘test’ the boundaries of legal orders—requiring amendment of the law, a reassertion of existing laws, or a complete reappraisal of how the law perceives certain activities and transactions (De Filippi, Mannan, & Reijers, 2022). These unique features present a challenge to adequately classifying DAOs as existing default entity types (e.g., general partnerships, unincorporated associations) across jurisdictions (Hitchens & Roberts, 2023; Metjahic, 2017; Santana & Albareda, 2022; Schillig, 2022; Wang et al., 2019) or ‘wrapping’ DAOs (or parts of DAOs) into existing legal entity forms, such as corporations, cooperatives or other for-profit and nonprofit entities (Brummer & Seira, 2022).
Legal liability
Summary: Lack of limited liability is a major concern for DAO participants, as is the potential liability arising from governance participation. Legal researchers can analyze and create frameworks to help address core concerns both for the community DAO practitioners and regulators.
One major overarching issue that legal scholarship can contribute to is helping us better understand the specific liability risks for members and contributors when operating through a DAO that is not wrapped in a legal entity (whether registered or unregistered, noting that general partnerships and unincorporated associations can exist as legal entities without registration), thereby not benefiting from separate legal personality or limited liability (Chiu & Linarelli, 2021, p.144). While the risk of joint and several liability has often been flagged, certain issues can be explored further:
What are the grounds on which a claim could be brought against a DAO, its members and/or contributors? What are the duties of members or contributors (including core developers, administrators or delegates), the fulfillment of which would help avoid such liability? How will claims be brought against DAOs, contributors, or its members, individually or collectively? Who will bring such claims? When are DAOs most vulnerable to such claims (e.g., at times of financial distress, or following a hack, or strategic forks in the road)? What do theories on corporate attribution and rules on attribution tell us about the attribution and allocation of responsibilities and liabilities in the context of DAOs? What legal protections and tools are available to DAOs and their members to avoid liability? How will such liability be imposed if a judgment is delivered against a DAO or its members? If a judgment is delivered against a DAO or its members, how would the remedy be effective and timely if it must be formally recognised in each jurisdiction that the remedy is to be enforced? What civil and criminal remedies are available against DAOs and their members?
Ongoing legal proceedings (e.g., Ooki, bZx, Tulip Trading) continue to shed light on how courts view such issues.
There are also foreseeable liability risks that have yet to materialize in practice, such as the insolvency of a DAO. While a ‘wrapped’ DAO may be subject to the insolvency procedures of a traditional entity in the jurisdiction of registration or seat, it remains to be seen how creditors and bankruptcy courts treat unwrapped DAOs that are unable to pay their debts and how the technical and governance features of such DAOs figure in procedural arrangements and substantive considerations. For example, Oasis.app was ordered by the High Court of England and Wales to use their accidental multisignature signing permissions to return stolen tokens from a vault to the rightful owner (Gilbert & Haig, 2023), which offers insights into how the legacy justice system relies on such permissions existing whereas DAO practitioners are designing systems to optimize for security through decentralization so that such permissions do not exist. Research on the insolvency of general partnerships and unincorporated associations, among other things, may shed light on this issue.
Financial regulation
Summary: As DAOs often issue and rely on cryptographic tokens in their governance and operations, the relation of these financial technologies to existing financial regulation such as securities laws, financial services, and anti-money laundering regulation and taxation. Legal research can help to discern when and where existing regulation can apply, inform new regulatory frameworks and innovate by proposing Web3 enabled mechanisms to achieve regulatory equivalence in these areas.
Other important open issues for research include the relationship of DAOs with securities, financial services, and anti-money laundering and counter-terrorism financing (AML/CTF) frameworks designed to prevent, detect and prosecute financial crime, which were developed with legacy system entities with centralized management and more static membership in mind.
Within securities law, the key question is: should a DAO’s governance tokens be treated as securities? Inherently related to the processes around legal recognition of DAOs is the question of whether the crypto-tokens required for governance interactions (i.e. governance tokens) are or should be securities or otherwise regulated as financial products. A number of governance tokens have been alleged by the U.S. Securities Exchange Commission (SEC) as securities, in legal actions by the SEC against Coinbase, Binance, and others. These lawsuits will proceed over the course of 2022 and 2023, alongside policy efforts in the US and worldwide to establish the regulatory purview over crypto-tokens as commodities, securities, or new things for which new regulation is inspired by financial regulation but not constrained by it.
There are a range of legal questions within AML/CTF. For example, how can DAOs comply with the objectives and spirit of laws and regulations intended to combat illicit activities, while still retaining their distinctive features (e.g. pseudonymous or anonymous contributors)? More fundamentally, given the shortcomings of existing AML/CTF frameworks (Pol, 2020), can DAOs achieve these objectives more effectively and in a more privacy-preserving manner than these frameworks? Even more broadly, how can DAOs contribute to the regulatory discourse on the activities and transactions that are deemed to be (prohibited) money laundering? DAOs after all provide a fertile ground for experimentation, enabling novel approaches for structuring the interplay between the technical and legal codification of rules (De Filippi & Hassan, 2018).
Finally, another major open issue for research is taxation: whether and how should DAOs, their members, and contributors be taxed? How are they already being taxed? How may double-taxation and penalties be avoided?
Incorporation and legal recognition
Summary: Various jurisdictions have attempted to better regulate DAOs by creating bespoke legal entity forms for them. More comparative legal research, especially from the law and society perspective, can identify the benefits and tradeoffs of different approaches, contrast how each behaves in the face of exogenous shocks or changes, and analyze potential convergence of high-level approaches.
A number of jurisdictions have begun introducing legislation that creates bespoke entity forms for DAOs, starting with the US state of Vermont with its Blockchain-Based Limited Liability Company in 2018 (Wright, 2021), and followed soon by the US state of Wyoming amending its corporate law statutes to enable the registration of DAO LLCs in 2021 (Bellavitis et al., 2022) and the Marshall Islands also allowing for such registration (with different conditions) in 2022 (Bannermanquist, 2022). While each of the DAO legislations are different, the recognition of legal personality and limited liability of DAOs in all of these jurisdictions are predicated on the DAO registering with a registrar in their jurisdiction. Most recently, however, in March 2023 the US state of Utah adopted a DAO Act that will come into force in 2024, which amends the Utah Revised Uniform Limited Liability Company Act to ‘recognize’ a DAO as a limited liability DAO (an LLD) as equivalent to a Utah LLC so long as it meets certain requirements, such as appointing a registered agent in the state of Utah (Fannizadeh, 2023). The Zone Authority of the Catawba Digital Economic Zone also passed in February 2023 specific legislation to recognise a DAO as a limited liability company or unincorporated not-for-profit association (“PR008 – DAO Regulation.,” 2023). There are several jurisdictions across the globe that are exploring DAO legislation, including Australia (Select Committee on Australia as a Technology and Financial Centre, 2021), New Hampshire (NH - HB645, 2023), Malta (Ganado et al., 2020), the United Kingdom (Decentralised Autonomous Organisations (DAOs) - Call for Evidence, 2022), and St. Helena (St Helena Government Budget Speech 2022, 2022), while there are others in which academics have called for their introduction (e.g., North Carolina) (Conway, 2022). In addition, there have been jurisdictions like Malta that provide certain legal assurances to DAOs without recognizing their legal personality yet (Chiu & Linarelli, 2021; Magnuson, 2020).
Legal recognition of DAOs, and the ensuing questions around regulation of DAOs as another form of distinct legal person or if that is not appropriate then the responsibility and liability attribution frameworks that should apply, is still in its infancy, but there is a proliferation of views on whether and how each should be best achieved. The LAO had a strong influence on the Wyoming DAO LLC legislation (Wyoming Passes Bill Legalizing DAOs, n.d.), while MIDAO has championed the incorporation-based approach of registering DAOs by the Marshall Islands (MIDAO, 2022). The Utah DAO Act mirrors many provisions of the COALA Model Law on DAOs, while departing from its text in important respects (Fannizadeh, 2023). And the ongoing discussion on DAO legislation in Malta reveals that their approach to create a DAITO (Decentralized and Autonomous Innovative Technology Organizations) will also depart from the approaches mentioned above (Ganado et al., 2020). Future research could compare these different legislative approaches to regulating DAOs, particularly from a law & society scholarship perspective, as well as assess their resilience in the face of changes brought on by market developments, lawsuits, and other regulatory actions. It remains to be seen whether there will be a convergence of approaches on how DAOs are regulated, particularly as the questions outlined above are addressed, and if one ‘model’ ultimately prevails. Research on private international, stateless, marine law, space law, and transnational law approaches as applied to DAOs is also of great interest and may inform new innovative mechanisms to place DAOs within regulatory frameworks.
Dispute resolution systems
Summary: Smart contracts cannot cover disputes that have not or cannot be codified in software, forcing DAOs and DAO members to settle disputes and seek recourse through the legacy legal system. Legal research can contribute to studies of and solutions for on-chain versions of dispute resolution.
Plain language laws have a number of use-cases that deterministic code cannot cover, and vice versa, meaning that DAO members often have to resort to interacting with the legacy legal system in order to seek redress for grievances, to affect assets not governed by a smart contract, or to go around the contract logic by compelling off-chain enforcement. This suggests a number of different research questions:
What has been the result of experiments with existing on-chain dispute resolution systems such as Kleros, Aragon Court, and Celeste (Ast & Deffains, 2021)? How do such on-chain dispute resolution systems compare with other forms of alternative dispute resolution? How have they fared? Are there fundamental limits to code-is-law-style dispute resolution systems? How do we incentivize more efficient participation and fairer judgments in these dispute resolution systems? Are there ways of integrating smart contract enforcement with other forms of alternative dispute resolution?
While DAOs may want to interact with legacy legal systems for many reasons (and their ability to interoperate with the existing legal system may even be a competitive advantage relative to other forms of online organization), more research is needed to understand how to allow DAOs to become more autonomous from legacy legal systems."