Decentralised Autonomous Organisations (DAOs)

Current project status

• Initiation: Could include discussing scope and terms of reference with lead Government Department
• Pre-consultation: Could include approaching interest groups and specialists, producing scoping and issues papers, finalising terms of project
• Consultation: Likely to include consultation events and paper, making provisional proposals for comment
• Policy development: Will include analysis of consultation responses. Could include further issues papers and consultation on draft Bill
• Reported: Usually recommendations for law reform but can be advice to government, scoping report or other recommendations

We launched a public call for evidence on 16 November 2022. The call for evidence asks users and other experts for information about how DAOs can (and should) be characterised, and how the law of England and Wales might accommodate them now and in the future.

The Government asked the Law Commission to produce a scoping paper which examines the description and legal status of DAOs – a new type of collective organisational structure that often uses blockchain, smart contracts or similar technology.

> Read our call for evidence paper here. 

> Respond to our call for evidence paper here.

What is a DAO? 

A DAO is a novel type of organisational structure involving multiple participants online, that might rely on a blockchain systems, smart contracts, or other software-based systems (which are often open-source).

DAOs are increasingly important in the context of crypto-token and decentralised finance ecosystems, and are often contrasted with more traditional forms of organisation, which may function more privately, operate with less transparency and have more centralised governance structures.

While DAOs are sometimes likened to existing legal forms, such as general partnerships or unincorporated associations, they often have several different characteristics and elements which might distinguish them from those existing legal forms.

As such, the term “DAO” does not necessarily represent any particular type of organisational structure and therefore cannot on its own imply any particular legal treatment. The legal treatment of any particular organisation which is described as a DAO will instead depend on how its particular organisational arrangements are structured.

Some DAOs include a recognised legal form or incorporated entity. Many are involved with the development of code that is used to create smart contracts. Many DAOs also use smart contracts to automate or program some elements of their internal activity. Often those smart contracts are open-source and are themselves deployed to open-source blockchain systems.

What is an example of a DAO?

Examples of DAOs include social structures or organisations involving multiple participants set up for investment purposes — including to invest in or trade crypto-tokens and non-fungible tokens (NFTs), as well as fundraising, crowdsourcing or charitable purposes.

Many DAOs are also involved in software engineering — developing, modifying and maintaining open-source software infrastructure (such as blockchain systems or decentralised finance applications).

With ambiguity over what constitutes a DAO, how they can be structured and with the potential for more than one type of organisational form or legal characterisation, the Law Commission’s call for evidence paper seeks views on the characteristics and elements of this new type of organisation and how they relate to each other.

Many thousands of DAOs exist today, but few appear to be structured using the law of England and Wales. Huge amounts of value flow through, are created, used and sometimes lost by DAOs. This raises questions about their legal status, the liabilities of those who participate in them, and the rules and regulations that apply to them.

The project

The Law Commission has been asked to undertake a 15-month scoping study to explore and describe the current treatment of DAOs under the law of England and Wales. Part of the purpose of the project is to identify options for how DAOs should be treated in law in the future in a way which would clarify their status and facilitate their use.

The scoping paper will also attempt to describing certain composite elements of DAOs and the broader crypto-token and decentralised finance ecosystems. We think that this exercise is an important definitional building block in the process of applying existing legal principles to DAOs. Specifically, framing our discussion around the composite elements of DAOs is critical for breaking a DAO down and analysing the various relationships that might exist within that DAO, and the potential legal consequences of any such relationship.

This project is sponsored by the Department for Business, Energy and Industrial Strategy (BEIS) and is also of interest to HM Treasury, noting the legal implications that DAOs may have for both UK company law and rules covering financial service firms and crypto-tokens.

The Commission has not been asked, at this stage, to make formal recommendations for law reform.

The call for evidence 

In the call for evidence, we ask stakeholders for information on how DAOs are structured and operated, about how the law might best accommodate different types of DAO structures now and in the future and how DAOs themselves might integrate into existing legal frameworks. We also ask where the law of England and Wales might be inhibiting the establishment and operation of DAOs, which alternative jurisdictions DAOs choose to structure their arrangements in, and why.

Next steps

We hope to publish a scoping paper in the first half of 2024.

Contact

If you would like to be kept up to date, please email DAO@lawcommission.gov.uk and ask to be added to the stakeholder list for this project.

Law Commission projects on emerging technologies 

Over the last two years, the Law Commission of England and Wales has undertaken a number of law reform projects concerning emerging technologies, such as smart contracts, digital assets and electronic trade documents.

• Digital assets review – digital assets include crypto-tokens and non-fungible tokens (“NFTs”). In July 2022, the Commission published a consultation, which closed 4 November. We are now examining responses, which will inform our final recommendations published in 2023.
• Digital assets: which court, which law? – a review that aims to provide legal clarity as to which country’s laws would apply to a dispute involving digital subject matter, and which courts would have the power to hear the dispute. This review will ensure that English law remains a chosen law and the jurisdiction of choice for commercial parties.
• Smart contracts review – smart contracts are legally binding contracts in which contractual terms are defined in and/or performed automatically by a computer program. This project was completed in November 2021.
• Electronic trade documents review – in March 2022, the Commission published law reform recommendations to allow for the legal recognition of electronic versions of trade documents. The resultant Electronic Trade Documents Bill was introduced to Parliament on Wednesday 12 October.