[Law Commission] Decentralised autonomous organisations (DAOs)

The term decentralised autonomous organisation (“DAO”) describes, in very broad terms, a new type of online organisation using rules set out in computer code. A DAO will generally bring together a community of (human) participants with a shared goal – whether profit-making, social or charitable.

At least originally, DAOs were conceived of as an alternative to traditional business structures.1 They were said to offer a more equitable and transparent model, relying more on technology than on humans and institutional intermediaries, thereby removing or limiting human discretion and centralised control. They were intended to offer participants the opportunity to determine the direction of the organisation’s activities by voting on governance and operational matters using this model.

In this paper, we aim to give a clear introduction to what DAOs are, and to situate them within the legal framework of England and Wales (to the extent possible), identifying how the current law might respond to, or facilitate, DAOs. We also identify areas where further work might be useful to accommodate these new types of arrangement, if this were thought desirable, and to ensure that their activities are within the reach of the regulatory regime where appropriate.

DAOs – broadly seen as organisations or arrangements of participants coming together for a common purpose and using particular technologies for aspects of their governance – vary considerably in their size and structure, giving rise to a range of questions for any particular DAO, including:

• What, legally speaking, is the DAO? For example, does it use a limited company or trust structure? Or, if it has not actively adopted a recognised legal form, how can it be characterised in legal terms? For example, could it be characterised as a general partnership or is it simply an arrangement of multilateral contracts between different participants?
• Who is liable for the actions of the DAO, and how can they be held accountable?
• Which jurisdiction’s laws apply to determine the answers to these and other questions? If the DAO exists only online and has not adopted a recognised legal structure that links it to a particular jurisdiction, it may not be tied to, or associated with, any particular place.
• Which jurisdiction’s tax and regulatory rules is the entity subject to? Even if a DAO can be associated for private law purposes with a particular jurisdiction, it or its participants may have tax, regulatory or other liabilities beyond that jurisdiction.

In this paper, we give an introduction to the broad concept of a “DAO” and explain some of the practical and legal questions they raise. We identify a spectrum along which different types of “DAOs” will fall depending on how formalised their structures are. That spectrum includes (in our own terminology):

(1) “pure” DAOs: arrangements implemented online through computer code with very limited real world activity, no formal legal structuring and rejecting (deliberately or otherwise) dependence on law and legal institutions for their existence (although they may well still attract legal and regulatory consequences);

(2) hybrid arrangements: arrangements combining code-based coordination with deliberate use of one or more forms of legal entity; and

(3) digital legal entities: arrangements where an incorporated legal entity adopts digitalisation through the use of technology at the heart of its operations or governance.

Cryptoassets are generally unregulated in the UK. However, activities relating to cryptoassets are regulated in this jurisdiction under three regulatory frameworks:

(1) Anti-money laundering framework: Cryptoasset businesses must register with the FCA under the MLRs if they pose a money laundering risk. DAOs exchanging tokens for money or other cryptoassets in the UK may also fall under this framework.

(2) Financial promotions framework: This framework regulates cryptoasset promotions that impact the UK. DAO governance tokens, if considered cryptoassets, may be subject to these rules, affecting how they are advertised to UK investors.

(3) The regulated activities framework: Cryptoassets that qualify as “specified investments” under FSMA require FCA authorization. DAO tokens may be classified as security tokens or units in a CIS if they involve investments and profit distribution.