Decentralized Autonomous Organizations Create Legal Uncertainty and Opportunity

As Decentralized Autonomous Organizations become an increasingly popular means to bring global networks together, the legal uncertainties create opportunities for improvement and advancement. 

Blockchain technology has been an ever-growing development in creating shared data networks that verify and save various transactions. The newest development, Decentralized Autonomous Organizations (DAO), takes blockchain tech a step further by establishing an expansive, transparent, and objective rules-based structure. A DAO allows members to vote on how the organization will function: its rules, its finances, its objectives. Based on the DAO’s code, it will perform certain actions when a threshold vote (for example 50%) is met. Instead of a small group running the operations and making the decisions for the whole, the entire DAO membership has a voice in the day-to-day functions of the organization. Essentially a DAO executes its actions via code rather than behind closed doors.[1]

Membership into a DAO requires purchasing DAO tokens, like a cryptocurrency. Though a user must be authenticated, most DAOs are open to all and do not require authorization. Once inside, a member uses their purchased tokens to vote on proposals, options, and decisions based on the DAO’s objectives.[2] Some DAOs have been used to purchase sport teams or pieces of property. Others have been used as a means of financial investment. While others raise funds to support causes, like the war in Ukraine.  

Despite the scope of the DAOs, there are serious concerns that undermine their credibility. In 2016, a German startup created “The DAO” to generate support for an investment campaign. Less than two months later, it raised over $150 million from its members. Unfortunately, due to gaps in The DAO’s code, hackers were able to steal over $50 million from the fund. Though users were refunded their money and the account was frozen, the attack undermined the credibility of the code and the system.[3]

However, the technology has only improved in the last six years. So much so that several international and national legislative systems have recognized the legal structure of DAOs. The Marshall Islands became the first country to recognize DAOs as a legal entity. In the U.S., both Tennessee and Wyoming have enacted statutes to simplify incorporation for a DAO and for formation of the organizations as legal groups.[4] These developments implicate the future of DAOs and their legal possibilities. 

 Following the hacking of The DAO and the ongoing legislative action, the legal system has developed alongside the technology. For example, the SEC recognized DAO tokens and currency as a security and the IRS treats the tokens as a virtual currency. However, there are still serious holes in the legal system when it comes to DAOs.  

 For instance, because DAOs do not have a legal framework to operate within, their business operations are without boundaries. This creates problems when DAOs merge and combine as the organizations can contract without legal guidelines. This is exactly what happened when two financial DAOs merged and integrated their tokens. Without the legal structure to dictate the merger, users in the minority of the decision were left with little protection and security. Despite approval by DAO members, the agreement was open-ended and uncertain.[5]

Likewise, because ownership of a DAO is essentially non-existent, legal liability on an infringing DAO becomes unclear. It would be difficult to assert IP protection over all the users in a DAO, let alone to find all of those members. On the other hand, ownership over the intellectual property of a DAO’s code and software also becomes uncertain. This creates serious concerns when asserting and defending ownership over a DAO. Given hacks and leaks in the past, this lack of a legal ownership structure, though appealing, can pave the way for endless infringing.[6]

Nonetheless, some in the industry view the enforcement of intellectual property rights by a DAO as a healthy development for decentralized finance and a sign that DAOs have entered the economic mainstream.[7]

 As DAOs continue to become more widespread and far reaching, the law will be forced to adapt and grow with them. Despite the development of DAOs since their inception, there are still serious concerns and implications that need to be addressed before true decentralization and transparency can be reached. 








Category: Firm News