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

The Government has recently asked us to carry out a scoping study into DAOs. We intend to begin our work in summer 2022, and issue a call for evidence seeking views on current practice later this year.

The problem

DAOs are a new form of online, decentralised organisational structure. They are generally member-led, with bespoke governance and some form of treasury (often denominated in crypto-tokens). They are increasingly important in the context of crypto-token networks and many DAOs hold assets of significant value, but their legal, regulatory and tax status is unclear.

In general, a DAO is set up by interested participants coming together and agreeing on the rules of the organisation. Some or all of these rules are then recorded in a network of smart contracts, normally based on a decentralised protocol such as Ethereum. The organisational smart contracts will subsist on the relevant protocol system and will autonomously execute the process of the DAO’s governance and/or its commercial activities, to the extent they are programmed to do so. The need for human oversight is reduced because the network of smart contracts controls a large part of the activities and governance of the organisation.

DAOs are intended to work on a decentralised basis, the idea being that there is no central organisation, such as a CEO or board of directors, responsible for the governance of the DAO. However, where decision-making above the automated processes is required, governance is generally made by voting. In addition, many DAO structures today utilise some form of “centralising” element, such as using a limited liability company. Normally this is for a combination of practical, legal, regulatory and tax reasons.

DAOs are said to offer multiple benefits to market participants and consumers, incentivising cooperation, innovation and participation, levelling playing fields, removing human error, lowering costs and increasing transparency. They could be used, for example, by freelancer networks where members pool their funds to pay for software subscriptions, charitable organisations where members approve donations, or venture capital firms to invest in certain asset classes.

At the same time, there are many legal questions which remain unanswered in the context of DAOs, including:

  • What is the legal nature of a DAO? Is it capable of being a limited company, LLP or general partnership? Is it some other novel type of legal entity?
  • Who bears the brunt of liability if something goes wrong? Does it rest with the investors, developers, or with the DAO?
  • Should a DAO have a separate legal personality enabling it to hold assets, sign contracts etc? How, practically speaking, could contracts or other liabilities be enforced against it? How does the concept of sufficient decentralisation apply to DAOs?
  • How do money laundering, corporate reporting and other regulatory concepts apply to DAOs, and who is liable for taxes if the DAO makes a profit?

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 and identify options for how they should be treated in law in the future in a way which would clarify their status and facilitate uptake.  Given the myriad DAO implementations, the scoping study might identify different “types” or “classes” of DAOs to which different rules might need to apply. In particular, some DAO organisational structures might be more or less “decentralised” or “autonomous” than others, which might justify different legal treatment.

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.

Next steps

We hope to begin this project in summer 2022. 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.

Project details

Area of law

Commercial and common law

Team

Commercial and Common Law team

Commissioner

Professor Sarah Green