Insights on Regulating Decentralized Autonomous Organizations
A recent report by the Law Commission in the United Kingdom has addressed the regulatory challenges surrounding decentralized autonomous organizations (DAOs). The commission emphasizes the necessity to align DAOs with existing financial regulations and tax frameworks. This move aims to establish a structured approach to govern the operations of DAOs within the legal landscape.
The publication, dated July 11, highlights the Commission's stance that a separate regulatory body specifically for DAO oversight is not immediately required. Instead, it urges regulatory authorities to monitor and evaluate the evolving nature of DAO activities. The Commission stressed the importance of continuous review to ensure DAO operations remain within legal boundaries.
The report acknowledges the ambiguity surrounding the definition of a DAO, noting the flexibility of the ecosystem to adapt to local legal requirements. The existence of diverse DAO forms, including pure DAOs, hybrid structures, and digital legal entities, further complicates the regulatory considerations.
According to the Commission, the applicable laws for a DAO are contingent upon its specific classification. For instance, DAOs engaging in activities related to specified investments may fall under the Financial Services and Markets Act 2000. This inclusion arises when DAOs issue governance tokens resembling shares, conferring voting rights and obtained through investment in the organization.
Moreover, the Commission highlights the potential regulation of DAO-related tokens under the UK's promotional guidelines aimed at consumer protection. Depending on the DAO type, some entities may be classified as unincorporated associations, where individuals collaborate to pursue common objectives. Unlike corporations, unincorporated associations lack a distinct legal identity, making individual members liable for legal obligations.
The report emphasizes the Commission's stance that a standardized regulatory approach for DAOs may not be suitable due to the diverse nature of these entities. At this nascent stage of DAO development, developing a tailored legal framework for DAOs in England and Wales is not recommended.
Despite this, the Commission recognizes that fully decentralized DAOs could face legal repercussions through civil and enforcement actions, especially when employing smart contracts that hold legal validity.
Notably, previous legal scrutiny on DAOs was witnessed in a class action lawsuit involving the bZx protocol hack in 2021. The categorization of the bZx DAO as an unincorporated association by the Commodity Futures Trading Commission (CFTC) underscored the complexities in defining DAOs' legal status.
In a global context, the Republic of the Marshall Islands and the state of Wyoming have recognized DAOs as legal entities, indicating varying approaches towards DAO regulation.
In the United States, Senator Elizabeth Warren's proposal to introduce the Digital Asset Anti-Money Laundering Act of 2022 reflects efforts to extend anti-money laundering regulations to DAOs and decentralized finance platforms.
The evolving landscape of DAO regulation necessitates ongoing assessment and adaptation of legal frameworks to ensure the accountability and compliance of these innovative entities.
