The Law Commission of England and Wales has called for evidence on decentralised autonomous organisations (DAOs) as part of a fifteen-month scoping study. The UK government has requested that the Commission produces a report about how DAOs can operate under the existing law, although the Law Commission will not make recommendations for law reform at this stage.
Since 2020, the Law Commission of England and Wales has been working on a range of projects aimed at facilitating the use of emerging technologies, including on smart (legal) contracts and digital assets (including crypto-tokens). The case for a project on DAOs emerged from the Law Commission’s work on digital assets in particular.
DAO who? And why should I care?
Two of the reasons why the report has been commissioned are to remove the ambiguity over (1) what makes a DAO, and (2) their structure. Nevertheless, the Law Commission currently describes a DAO as a “new type of organisational structure involving participants online, that may rely on a blockchain systems, smart contracts or other software-based systems”.
The request from the UK government for a report into DAOs stems from their increasing importance, particularly in a business context. This is because DAOs are particularly important in the world of cryptocurrency and decentralised finance. DAOs can resemble existing legal entities such as general partnerships or unincorporated associations, but they very much differ in structure.
According to the Law Commissioner, Sarah Green, DAOs are important because they “are said to offer multiple benefits to market participants, incentivising cooperation and innovation, levelling playing fields, reducing the scope for human error, lowering costs, and increasing transparency.
So what’s the issue here?
The Law Commissioner says that the legal and regulatory status of DAOs remains “unclear”.
The ambiguity over what a DAO is exactly carries heavy financial and consumer implications, considering that DAOs are often involved in software engineering, open-source infrastructure, as well as trading and investments into crypto-tokens such as NFTs. Those DAOs circulate huge amounts of value, whether monetary or data, for example. Also, there are thousands of DAOs currently in existence and the Law Commission states that very few are structured under the law of England and Wales.
What happens next?
For the next ten weeks, The Law Commission will be collecting evidence from those with experience or expertise in DAOs to find out further information on matters such as:
- A closer look at when a DAO would decide to include an incorporated legal entity into its structure and its characteristics
- The governance structures that exist within a DAO
- The use of crypto-tokens and smart contracts within these structures
- The duties of care and/or fiduciary duties of developers of open-source software protocols
- If a smart contract should be considered as having a legal personality
- The regulatory oversight and corporate reporting expected of DAOs, including anti-money-laundering and tax liability considerations
- The status of investors and token holders
- The legal forms used by DAOs in other jurisdictions
BEIS (Department for Business, Energy and Industrial Strategy) is the main sponsor of the project. It is also of interest to HM Treasury, because of the legal implications that DAOs may have for UK company law and rules covering financial service firms and crypto-tokens.
In the US, the US Commodity Futures Trading Commission (CFTC) has taken action against members of a DAO called Ooki, claiming that it has broken federal commodities laws. The CFTC says Ooki illegally offered leveraged and margin crypto trading products to investors based in the US. In addition, it argues that the Ooki DAO is an unincorporated association and that its members are responsible for legal breaches. It is an interesting example of the issue that the Law Commission may well be considering.
The call for evidence ends on 25 January 2023. The responses will shape the scoping study.
“our preliminary view is that the law of England and Wales provides a variety of flexible legal tools and principles that market participants can rely on to provide a high degree of legal certainty when structuring their organisational arrangements. This does not change simply because an organisational arrangement is loosely described as a DAO”