Decentralised Autonomous Organisation (DAO)
Your business description
What is a DAO?
A Decentralized Autonomous Organization (DAO) is a computer program, running on a peer-to-peer network, incorporating governance and decision-making rules. DAOs can be programmed to operate autonomously, without human involvement, or the code can provide for direct, real-time control of the DAO and funds controlled by it. The earliest DAOs are software controlled community organization experiments which seek to re-implement certain aspects of traditional corporate governance, replacing voluntary compliance with a corporation’s charter with actual compliance with pre-agreed computer code.
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."
Do I need to incorporate a DAO?
"DAOs are effectively unincorporated associations. The law holds every person in the group to liability for everything the group does (through any of its members). This means that if one member purports to act for the group and gets into trouble, everyone else will be responsible and have to bear the debts.
It is not a separate legal entity and cannot sue or be sued in its own name.
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Suffice to say, given all the above limitations, it is preferable to have an alternative structure to an unincorporated association with loose constitutional contractual terms.
One option is to incorporate a company limited by guarantee (CLG). CLGs afford separate legal liability benefits, and can thus hold property or maintain bank accounts on its own and sue and be sued in its own name. Considered a public company, it can have more than 50 members and because it has no share capital, it must simply maintain a register of members. The practical challenge would be to administratively update the register of members (which must contain the name, address and date of obtaining membership of members) since most DAOs confer membership based on possession and control of governance tokens simplicities. Share-based membership is possible and would address this issue since people who want to be members must submit a proposal to be a member.
Alternatively, the CLG can comprise only certain key founding members of the DAO as members and directors of the CLG; and to constitutionally provide expressly that the CLG’s members and directors must take into consideration the decisions of the DAO made in voted resolutions from time to time. Perhaps other rules could be spelt out in the constitution concerning the DAO membership."
Are DAOs regulated in Singapore?
While DAO's are being assessed by regulatory bodies, they are not currently regulated in Singapore.
The Regulatory Perspective on DAOs
"Providing a regulatory perspective (on an entirely exploratory basis and not in any way representing the views of ACRA), Mr Leong Weng Tat, the Chief Legal Officer of ACRA, named three broad areas worthy of attention. The first is the growth of blockchain – while the technology was initially associated mainly with virtual currencies, today it has expanded to include tokens which provide its holders with various rights, such as voting and equity tokens. This may mean that legislation targeted at traditional corporate forms, such as the Companies Act, will require updating to accommodate these newer entities.
The second area concerns appropriate regulatory responses. Mr Leong noted that adapting our regulations in traditional areas of concerns such as anti-money laundering, remain robust, IT governance will remain important, not least because hacks on newer entities such as DAOs are not infrequent. To this end, a possible approach may be to take reference from legislation across various jurisdictions dealing with areas, such as the regulation of autonomous vehicles, facing similar issues.
The third area of interest focuses on the trends and developments in Singapore. Given that Singapore has embarked on its Smart Nation initiative underpinned by digital society, the trend is that the nation will move towards the path of digitalisation. This means that the accompanying regulatory developments will also be in that direction. As such, there will be the need for a balance to be struck between fostering innovation and ensuring regulatory protection."
How are DAOs regulated if they generate a return on its assets?
"Another potential legal issue with DAOs is that once some property or assets are involved and there are potential or actual returns, the enterprise may become deemed to be a collective investment scheme under applicable investment regulations eg under the Securities and Futures Act in Singapore. The offer or trading of the digital tokens relating to the DAO may then become an offer of units in CIS which is unlawful unless the relevant requirements under the law have been met. In 2017, the US SEC famously declared that “the DAO”’s offer of tokens is an unauthorised offer of securities (under the US Howey test)."