The Law Commission of England and Wales has launched a call for evidence asking about users and how Decentralised Autonomous Organisations (DAOs) can (and should) be characterised, and how the law of England and Wales might accommodate them now and in the future.
The Commission explains that a DAO is a novel type of organisational structure involving multiple participants online, that might rely on a blockchain system, smart contracts, or other software-based systems (which are often open-source). DAOs are increasingly important in the context of crypto-token and decentralised finance ecosystems.
They are often compared with more traditional forms of organisation, which may function more privately, operate with less transparency and have more centralised governance structures. Although DAOs are sometimes likened to existing legal forms, such as general partnerships or unincorporated associations, they often have several different characteristics and elements which might distinguish them from those existing legal forms.
As a result, the term “DAO” does not necessarily represent any particular type of organisational structure and cannot on its own imply any particular legal treatment. The legal treatment of any particular organisation which is described as a DAO will instead depend on how its particular organisational arrangements are structured.
Some DAOs include a recognised legal form or incorporated entity. Many are involved with the development of code that is used to create smart contracts. Many DAOs also use smart contracts to automate or program some elements of their internal activity. Often those smart contracts are open-source and are themselves deployed to open-source blockchain systems.
Examples of DAOs include social structures or organisations involving multiple participants set up for investment purposes – including to invest in or trade crypto-tokens and NFTs, as well as fundraising, crowdsourcing, or charitable purposes.
Many DAOs are also involved in software engineering – developing, modifying and maintaining open-source software infrastructure (such as blockchain systems or decentralised finance applications).
With ambiguity over what constitutes a DAO, how they can be structured using the law of England and Wales. Huge amounts of value flow through, are created, used and sometimes lost, by DAOs. This raises questions about their legal status, the liabilities of those who participate in them, and the rules and regulations that apply to them.
The project
The Law Commission has been asked to undertake a 15-month scoping study to explore and describe the current treatment of DAOs under the law of England and Wales. Part of the project is to identify options for how DAOs should be treated in law in the future in a way which would clarify their status and facilitate their use.
The scoping paper will also attempt to describe certain composite elements of DAOs and the broader crypto-token and decentralised finance ecosystems. The Commission believes that this exercise is an important definitional building block in the process of applying existing legal principles to DAOs. In particular, framing the discussion around the composite elements of DAOs is important to break a DAO down and analyse the various relationships that might exist within that DAO, and the potential legal consequences of any such relationship.
The Department for Business, Energy and Industrial Strategy is the main sponsor of the project. However, it is also of interest to HM Treasury, due to the legal implications that DAOs may have for both UK company law and rules covering financial service firms and crypto-tokens.
At this stage, the Commission has not been asked to make formal recommendations for law reform.
The Law Commission is asking for information on how DAOs are structured and operated, about how the law might best accommodate different types of DAO structures now and in the future and how DAOs themselves might integrate into existing legal frameworks. It is also asking where the law of England and Wales might be inhibiting the establishment and operation of DAOs, which alternative jurisdictions DAOs choose to structure their arrangements in, and why.
