Nature of Decentralised Autonomous Organisations (DAOs)

What is the legal status of DAOs?

  • "DAOs are not currently recognized as legal entities, creating uncertainty as to the legal rights attributable to a DAO and who bears the legal responsibilities. It is possible that in the abstract a DAO would fall within the categories of a general partnership or joint venture agreement between the participants. In such circumstances, courts will generally infer and impose such a structure on a DAO, in the absence of any formative document or articles. While a DAO might have extensive rules governing its conduct between internal members, those rules may be of little use when interacting with an external jurisdiction’s legal system.

    Further challenges arise in respect of determining jurisdiction. What is the jurisdiction of a DAO and where are its members based? The developers of The DAO are known, but that will not always be the case – a DAO could be created by many contributors, some known, some not known, based in multiple jurisdictions, using servers based in yet more jurisdictions.

    DAO tokens represent the initial contribution by each investor, but if there is no legal entity they cannot be considered to be shares or ownership rights or stakes. However, the risk of regulators recharacterizing DAO tokens as securities remains. Absent legal certainty as to what a DAO is, and given the difficulty in properly identifying individual members of a DAO at any particular point in time, it will be very difficult to properly assign ownership in the product of contracts.

    These problems are exacerbated by the perceived focus on decentralization. For many participants a key feature of DAOs is unfettered and anonymous participation. Initial funding is necessarily sent from (and dividends paid to) pseudo-anonymous Ethereum accounts and, in any event, DAO tokens are freely traded between accounts. The votes of participants are not attributed or attributable either."

    Source: Allen & Overy