There are ongoing debates surrounding the legal status of DAOs, their participants and procedures. For example, how can an organization that is inherently transnational in nature, benefit from affordances such as legal personality and limited liability without incorporation in a single jurisdiction? Or conversely, how can legal requirements like “registration” & “reporting” be translated to an organization made of bits? This legal insecurity has significantly hampered the development and broader adoption of this new form of social organization.
The DAO Model Law is a multistakeholder effort led by COALA (Coalition of Legal Automated Applications) to provide legal certainty for DAOs and their participants, and unlike other regulatory frameworks, accommodate flexibility for their unique features and further innovation. The Model Law seeks to strike a balance between the importance of innovation and experimental freedom in technological development, and the importance of legal protections and a sound regulatory framework in encouraging broader societal engagement with this new organizational structure.
Who is the DAO Model Law aimed for?
For policy-makers who wish to support the formation and management of DAOs, the DAO Model Law provides a harmonized model for legislation that still harnesses the unique properties of DAOs that make them alegal, or not currently seen by the legal system, in the first place. For instance, rather than seeking to draw DAOs within a territorial legal order, the Model Law emphasizes recognition by states, rather than registration in states, to accommodate the transnational nature of DAOs. It also combines extensive party autonomy for DAO members and separate legal personality for the DAO in order to facilitate, rather than hinder, pseudonymous participation and recognize that human-to-machine or machine-to-machine interactions can carry out valid legal acts.
For participants in DAOs, the Model Law provides the benefits of legal personality, legal capacity and limited liability. Although no governmental authority could directly enforce the Model Law provisions onto a DAO, these benefits offer ample incentive to comply with the Model Law. The recognition of legal personhood for DAOs entails many rights and protections—such as the right to own assets, enter into contractual relationships, sue or be sued, and potentially benefit from a limited liability regime. Some will forgo legal recognition, preferring instead autonomy in their operation and governance. DAOs that seek legal personality and limited liability of its members might need to implement specific features and technological guarantees that accommodate important policy objectives, such as publicity about the formation and governance of business organizations.
How does the DAO Model law work?
The Model Law task force studied the provisions of corporate law, aiming for a light-touch approach to regulation based on the principles of functional and regulatory equivalence.
Functional equivalences work as a pathway to establish the equivalence of an object that is already contemplated by legal rule and another that is not. Such equivalences broaden the means by which a regulated activity can be considered legally compliant. A well-known precedent is the UNCITRAL Model Law for Electronic Commerce, which establishes functional equivalence between a paper-based document and an electronic document. For the regulation of DAOs, the Model Law aims to establish functional equivalence between the transfer of corporate shares on the official company share registers and the use of blockchain-based infrastructure to achieve the same function.
Regulatory equivalences work with a similar logic, identifying the policy objective behind any given regulation and how this same goal can be achieved through different means, in this case through the affordances of blockchain technology. To establish regulatory equivalence the Model Law holds that the publication of certain information on a publicly-accessible blockchain meets the publicity objective of corporate registration.
Using these conceptual frameworks, the Model Law addresses the following points:
- Identification of legal corporate rules that can be fulfilled through technological guarantees in the blockchain space (e.g. smart-contract-based separation of funds, blockchain-enforced “corporate veil”, real-time audits and reporting, agency problem, etc. )
- Discussions on the specificities of blockchain-based organisations that must be accounted for from a legal perspective(e.g. forking, protocol changes, etc.) and elaboration of techno-legal solutions to address these specificities.
- Identification of legal corporate rules that do not have a technical equivalent solution (e.g., KYC identification of all participants) and elaboration of techno-legal alternatives that better account for the technical guarantees of blockchain technology.
- Establishing the legal foundations of ‘regulatory equivalence’ — collecting previous examples of “functional equivalence” (e.g. the UNCITRAL electronic contracts) and “regulatory equivalence” (e.g. EU ‘principle-based’ regulatory approaches).
The DAO Model Law draws on lessons from model laws for flexible business organizations (e.g., OAS Model Law for the Simplified Stock Corporation) to pursue specific objectives like the uniform treatment of DAOs across States—particularly with respect to recognizing the legal personality and/or limited liability of its members. It also considers a series of new scenarios that are not encountered during the ordinary operations of more traditional organisations, by setting out procedures for hard forking decisions and remedying technical bugs or exploits that would otherwise render the DAO unoperational. It stipulates a series of governance rules for handling exceptional events such as TheDAO attack and other contentious forks, thereby mitigating both public policy concerns regarding unaccountability and participant concerns about potential joint and several liability.
The task force has already identified ways to extend the Model Law moving forward. Through a series of case studies looking at current DAO governance models and their stakeholders, the Model Law might address common problems in corporate governance, such as agency problems and conflicts of interest among multiple stakeholders, by examining how blockchain addresses these issues that would otherwise be addressed by legal means. The Model Law might also identify functional equivalence between existing corporate governance requirements and the governance procedures of DAOs and their internal controls for decision-making, participation and funds management.
In the coming months the task force hopes to engage a broad audience of people and diverse stakeholders in order to raise awareness on the topics addressed, foster discussions and collaborate on the model’s continuous evolution. With this first iteration, the goal was to convene legal scholars in blockchain to bridge the gap between a variety of existing and potential activities of DAOs and the various regulatory frameworks currently or yet to be implemented in different jurisdictions. But this is only the beginning of a much longer journey: the DAO Model Law will depend on ongoing exchanges between lawyers, technologists and eventually policy makers to thoughtfully address the fast-moving landscape of blockchain-based systems and achieve broad and participatory adoption.
Read the DAO Model Law in full here. Please do not hesitate to reach out to us at email@example.com if you would like to learn more or contribute to the DAO Model Law project.
Choi, C., De Filippi, P., Dudley, R., Elrifai, S., Fannizadeh, F., Guillaume, F., Leiter, A., Mannan, M., McMullen, G., Riva, S., Shimony O. (2021)