The Law Commission of England and Wales undertook a thorough public consultation on the legal status of Decentralised Autonomous Organisations (DAOs) as part of ongoing legal reform on crypto-assets and decentralised finance ('DeFi'). The consultation took place from 16 November 2022 and concluded on 25 January 2023, inviting input from the public on potential regulation for DAOs, entities which are gaining prominence within the crypto and DeFi contexts. The 96-page document explored DAO governance, decision-making processes, reporting, and other applicable regulatory concepts.
DAOs, renowned for their collective organisational structure that operates via blockchain technologies, smart contracts, or other software-based systems, do not have a standard definition in the consultation document. Thousands of DAOs exist today, yet few seem to align with the existing law of England and Wales. This discrepancy marked a crucial need for legal reform, addressing the DAOs' legal status, responsibilities of those involved, and applicable provisions. Despite the benefits DAOs provide, such as innovation, cost reduction, and enhanced transparency, concrete legislative steps must be taken to prevent legal hurdles. This effort also aimed at transforming the UK into a favourable environment for the proliferation of DAOs. The review and proposed changes related to digital assets formed part of an ongoing legal reformation process.
In a broader perspective, the UK considered lessons from other jurisdictions like Wyoming, Tennessee, and the Marshall Islands, all of which have adjusted their legal stances to cater to DAOs. Some jurisdictions introduced additional corporate forms, such as Wyoming's DAO LLC, to incentivise DAOs to incorporate these within their organisational structures. Others, like Tennessee, incorporated provisions for DAOs within their corporate codes, while the Marshall Islands amended their Non-Profit Entities Act, allowing a DAO to register as a non-profit LLC.
Even though the formation of a specific DAO might not always be feasible or desired by the market, it provides an additional tool that could be beneficial for parties interested in creating a basic DAO with immediate access to limited liability, or in incorporating a limited liability sub-DAO within a more complex organisational structure.
The culmination of the consultation phase was a comprehensive report that identified key issues and provided options for the future legal treatment of DAOs. This aimed to clarify their status and facilitate their use. The document primarily described the ecosystem of DAOs, broader crypto-token, and decentralised finance, without being merely a 'definitional exercise' in the process of applying existing legal principles to DAOs. Instead, it provided an in-depth analysis of the features of DAOs, including their market perspective. Similar projects have been undertaken in the past, dealing with emerging technologies like smart contracts, digital goods, and electronic business documents.