Decentralized Autonomous Organizations (DAO): current situation
On March 1, 2023, the Utah Decentralized Autonomous Organizations Act (Utah DAO Act) was published. This diploma grants the status of legal entity to DAOs and was based on the COALA model law (multidisciplinary community of specialists in the ecosystem of decentralization).
The Utah DAO Act provides for the creation of “Utah LLDs” (Utah limited liability DAOs), which are assigned legal personality similar to what happens with traditional limited liability companies (LLCs). However, the “Utah LLDs” and “LLCs” regimes are not the same, so we are dealing with different entities.
The terms of ownership of the DAO and the structure of participation are defined according to its distinct nature and with a wide margin of discretion. Due to this distinct nature, an entry barrier is also included to ensure that the DAO is truly a decentralized entity and is not controlled by any central authority.
In this regard, Utah LLDs must ensure that their protocols meet certain quality standards. The anonymity and legal protection of its holders must be reflected in the articles of association and the tax treatment must reflect its unique characteristics and functionalities.
We are, therefore, facing a legal regime that expressly enshrines a new type of society.
And this is not a single example, as there are three other examples worthy of mention.
In 2018, the pioneering Vermont Senate Bill S.269 (Act 205) was published, which created a legal regime for limited liability companies that use blockchain technology within the framework of their commercial activity. As with traditional corporate types in Portugal and with Utah LLDs, the name of this type of company must include a designation or abbreviation that identifies its status, namely through the designation “Blockchain-Based Limited Liability Company” or the abbreviation “BBLLC”.
In 2021, Wyoming Senate Bill SF0038 was published, which created a legal regime for DAOs similar to the Utah DAO Act. In this case, according to this law, the DAO signature must include an abbreviation that identifies its DAO status, namely through the words “DAO”, “LAO” (limited liability autonomous organization) or “DAO LLC”.
More recently, in December 2022, the Decentralized Autonomous Organizations (DAO) Act was published, which also created a similar legal regime for the so-called “DAO LLCs”.
In the meantime, within the scope of the European Union, for the time being, there is no harmonized and adequate legal framework for DAOs.
In January of this year 2023, during his speech at the annual meeting of the World Economic Forum, Timo Harakka, the Minister of Transport and Communications of Finland, suggested that the European Union should recognize and regulate DAOs.
It turns out that, to date, there are no developments in this direction.
Consequently, in Portugal, for the time being, there is also no specific and adequate legal regime for DAOs. However, there are some positions on the possibly applicable regimes.
What seems to be the dominant position, which I now subscribe to, is to subject the DAOs to the regime of civil society (according to articles 980.º et seq. of the Portuguese Civil Code), provided that they meet the following three conditions: the “contributions of the parties”, a “common exercise of an activity that is not of mere enjoyment” and the “purpose of profit sharing”.
This application “would have the effect of being jointly managed by all the partners”, as well as their “personal and joint liability” if the company’s assets were forfeited.
In addition, although civil societies do not have legal personality (unless they register), the possibility that “the responsibility of the founders, creators and managers of the platform” is assessed based on the criteria for determining the “compulsory civil liability”, essentially due to the “special relationship established between these agents and their investors”.
Still according to this position, with regard to the applicable law, in the case of a fully decentralized DAO, by nature, “it will not be possible to identify the location of its network or its effective administration”. The nationality or residency of the group of holders who have sufficient voting rights to influence DAO decision-making can be an important connecting factor in determining applicable law.
As such, although there is currently no harmonized and adequate legal framework in Portugal (or within the scope of the European Union), in case of doubt, there are some solutions to consider.
But not for a long time.
With the entry into force of the Crypto-Assets Market Regulation (MiCA), as well as the Regulation providing for a pilot regime for market infrastructures based on distributed ledger technology (DLT Pilot Regime), everything indicates that DAOs will have to constitute itself as a legal person in order to carry out its activity and, this, again, without any harmonized and adequate legal framework for this purpose.
As a matter of logic, regulating crypto markets and DLT-based market infrastructure without regulating DAOs (and, for that matter, NFTs) seems to make little to no sense.
However, the European legislator seems to understand that it does, so for now, it remains to wait for the next episodes.
This text is an English translation of an opinion article in Portuguese published on 30.03.23 in the newspaper Dinheiro Vivo (https://www.dinheirovivo.pt/opiniao/organizacoes-autonomas-descentralizadas-dao-ponto-de-situacao-16098397.html).
