How to regulate a Decentralised Autonomous Organisation (DAO)

Anton Golib, Founder & President of SwissAssetDAO, just dropped an interesting update on DAO. What is a DAO? Well, let’s turn to Wikipedia:

A decentralised autonomous organisation, sometimes called a decentralised autonomous corporation, is an organisation managed in whole or in part by decentralised computer program, with voting and finances handled through a blockchain. In general terms, DAOs are member-owned communities without centralised leadership.

The problem with a DAO is how do you run it? What is the governance structure? What happens if you lose your money? Where is the law?

Well, the answer has just been delivered by the UK’s Law Commission. In a lengthy 289 page document, the Law Commission has determined the key attributes of a DAO and how it is governed. You might want to read the whole thing but, thanks to Anton, here’s the summary:

• Decentralisation and Autonomy: they nailed it – DAOs disperse power, avoiding central control. But many DAOs aren't as decentralised or autonomous as they claim.
• Hybrid and Digital Legal Entities: mixing smart contracts with legal structures. This is where traditional law meets innovation.
• Governance Tokens: these tokens give you a voice and a stake – regulation is catching up fast.
• Principle-Based Regulation: same risk, same rules – expect crypto to be treated like traditional finance soon.
• Privacy vs. AML: tech, like zero-knowledge proofs, could balance privacy and regulation – huge news for the crypto industry.
• No More BS Promotions: honest, clear marketing is a must – dodgy practices will face harsh penalties.
• Transparency: DAOs push for operational transparency—key to building trust in the crypto world.
• Tech-Neutral Laws: legislation should be tech-neutral, allowing innovation to thrive.

What’s next?

Well, the next steps are that the UK might introduce a limited liability model for DAOs and review company laws to better align with digital entities.

For a more detailed review, here are the specific conclusions and recommendations from the Law Commission:

Conclusion 1

We conclude that factual control (plus intention) can found a legal proprietary interest in a digital object. We conclude that in certain circumstances such a control-based legal proprietary interest can be separated from (and be inferior to or short of) a superior legal title.

Conclusion 2

We conclude that it is possible (with the requisite intention) to effect a legal transfer of a crypto-token off-chain by a change of control or onchain by a transfer operation that effects a state change.

Conclusion 3

We conclude that a special defence of good faith purchaser for value without notice applicable to crypto-tokens can be recognised and developed by the courts through incremental development of the common law. We conclude that this reasoning can also be extended to other third category things.

Conclusion 4

We conclude that under the law of England and Wales, crypto-token intermediated holding arrangements can be characterised and structured as trusts, including where the underlying entitlements are (1) held on a consolidated unallocated basis for the benefit of multiple users, and (2) potentially even commingled with unallocated entitlements held for the benefit of the holding intermediary itself.

We conclude that the best way to understand the interests of beneficiaries under such trusts are as rights of co-ownership in an equitable tenancy in common.

Conclusion 5

We conclude that recognition of a control-based legal proprietary interest could provide the basis for an alternative legal structure for custodial intermediated holding arrangements in addition to trusts. This could take the form of holding intermediaries being recognised as acquiring a control-based proprietary interest in held crypto-token entitlements that is subject to a superior legal title retained by users.

Conclusion 6

We conclude that it would be constructive for the courts to develop specific and discrete principles of tortious liability by analogy with, or which draw on some elements of, the tort of conversion to deal with wrongful interferences with third category things.

Recommendation 1

We recommend statutory confirmation that a thing will not be deprived of legal status as an object of personal property rights merely by reason of the fact that it is neither a thing in action nor a thing in possession.

Recommendation 2

We recommend that the Government creates or nominates a panel of industry-specific technical experts, legal practitioners, academics and judges to provide non-binding guidance on the complex and evolving issues relating to control (and other issues involving digital objects more broadly). This panel would need to include those with expertise in the crypto-token markets, and not just those with expertise in traditional finance markets or intermediated securities markets.

Recommendation 3

We recommend statutory amendment to the FCARs:

1. To clarify the extent to which and under what holding arrangements crypto-tokens, crypto-assets (including CBDCs and fiat currency-linked stablecoins) and/ or mere record/register tokens can satisfy the definition of cash, including potentially by providing additional guidance as to the interpretation of “money in any currency”, “account” and “similar claim to the repayment of money”.
2. To confirm that the characterisation of an asset that by itself satisfies the definition of a financial instrument or a credit claim will be unaffected by that asset being merely recorded or registered by a crypto-token within a blockchain or DLT-based system (where the underlying asset is not “linked” or “stapled” by any legal mechanism to the crypto-token that records them).
3. To confirm that, where an asset that satisfies the definition of a financial instrument or a credit claim is tokenised and effectively linked or stapled to a crypto-token that constitutes a distinct object of personal property rights from the perspective of and vested in the person that controls it, the linked or stapled token itself will similarly satisfy the relevant definition.
4. We recommend that laws applicable to UK companies should be reviewed to assess the merits of reforms that would confirm the validity of and/or expand the use of crypto-token networks for the issuance and transfer of equity and other registered corporate securities. In particular, we recommend that any such review should consider the extent to which applicable laws could and should support the use of public permissionless ledgers for the issuance and transfer of legal interests in equity and other registered corporate securities.

Recommendation 4

We recommend that, as a matter of priority, the Government sets up a multi-disciplinary project to formulate and put in place a bespoke statutory legal framework that better and more clearly facilitates the entering into, operation and enforcement of (certain) crypto-token and (certain) crypto-asset collateral arrangements.

For the full report and summary, click here: https://lawcom.gov.uk/document/digital-assets-final-report/

Finally, I couldn't resist this:

Strangers on the net exchanging payments

Wondering in the net

What were the chances we'd be sharing cash

DAO be DAO be doo

You get the idea …

#dadjoke