The Coalition of Automated Legal Applications has published a Model Law for DAOs, which seeks to bring legal certainty to the organisations.
WHAT IS A DAO?
Effectively an organisation that substitutes traditional governance with rules encoded as a computer program providing transparency and control to the organisation’s members.
Distributed, or decentralised, autonomous organisations are defined as smart contracts deployed on a public distributed ledger, which implement specific decision-making or governance rules enabling a multiplicity of actors to coordinate themselves in a decentralised fashion.
In this case, a legally binding smart contract would be both a digital asset (namely the constitution of the DAO) and the DAO itself.
DAOs can be registered or unregistered. While registered DAOs are organised according to the laws of a jurisdiction and registered in a corporate entity, the majority of DAOs are unregistered and created outside legal frameworks. This results in legal uncertainty, detrimental to the development and utilisation of DAOs.
DAOs differ greatly from traditional corporations: they have no registered offices, directors or employees, and are not recognised as a legal ‘person.’ Instead of articles of association or shareholder agreements, DAOs operate according to bylaws expressed in smart contracts. Through the deployment of these smart contracts, the amount of human intervention required for the performance of agreements is significantly lessened.
Whereas a traditional corporation is hierarchical, a DAO is typically fully democratised. Depending on the structure of a traditional corporation, changes can be demanded from a sole party. However, voting of members is required for changes to be implemented in a DAO. Moreover, while the activity of a traditional corporation is usually private and limited to the public, all activity of a DAO is transparent and fully public.
WHAT IS COALA AND THE MODEL LAW?
The Coalition of Automated Legal Applications (‘COALA’) is an international, multidisciplinary research and development initiative that endeavours to bring clarity to blockchain technologies, smart contracts and decentralised applications. The initiative is constituted of lawyers, academics, economists and computer scientists, amongst other disciplines.
On 19 June 2021, COALA published the Model Law for DAOs (‘Model Law’). The Model Law is designed as a best practice guide that seeks to address the vertical (principal-agent), horizontal (majority-minority principals) and firm-stakeholder agency problems that persist in corporate entity forms. While doing this, the Model Law intends to retain the features of DAOs that make these organisations valuable.
Since DAOs are inherently transnational, the Model Law endeavours to adopt a uniform set of rules that could be implemented across international jurisdictions. DAOs constituted in accordance with the Model Law’s formation requirements will be recognised as a legal entity separate and distinct from its members. To ensure its wide applicability, the Model Law provides a minimum level of rights, duties and protections that are widely recognised in legislation regarding analogous corporate entities in major jurisdictions.
The Model Law also stipulates specific provisions that address the unique features and challenges of DAOs. These include the procedure in the event of contentious forks in the underlying blockchain, DAO restructuring or failure events.
WHAT HAS BEEN THE REACTION TO THE MODEL LAW?
There is yet to be significant discourse on the Model Law. COALA claims the Model Law is essential to create a common legal framework applicable to DAOs, which will incentivise the creation of legally compliant DAOs.
Despite these benefits, the LexTech Institute has articulated that the challenge will be to convince legislators that the principles of functional and regulatory equivalence, on which the Model Law is based, safeguard the public interests of the states while guaranteeing members’ freedom in the way they do business.
Alternatively, some jurisdictions have opted for a different approach. On 1 July 2021, legislation came into force in Wyoming (USA) to allow DAOs to be registered as a distinct form of limited liability corporation, with accompanying rights and obligations tailored to their inherent mode of operation. Relevantly, these DAOs must be domiciled in the state, which COALA argues does not effectively leverage the cross border characteristics of blockchain technology.