DAO as a Legal Entity. Concept & Compliance Tips for Web3 Startups
As Decentralized Autonomous Organizations (DAOs) continue to evolve and gain traction in the world of blockchain and cryptocurrencies, the question of their legal status becomes increasingly pertinent. From the standpoint of natural law, a concept rooted in common sense and societal norms, forming a DAO can be as simple as creating an entity on a platform like ONIX DAO, co-signing a constitution with your co-founders, and operating under the principles of this unwritten law. However, this informal approach may not align with the perspectives of states, governments, courts, and law enforcement agencies.
To ensure a DAO is recognized as a legal entity by official authorities, there are more structured paths to consider. Presently, two jurisdictions stand out for offering direct registration options for DAOs: the United States and the Marshall Islands.
Registering a DAO in the United States
In the United States, the states of Delaware and Wyoming provide frameworks for registering DAOs as Limited Liability Companies (LLCs). These jurisdictions allow DAOs to be algorithmically managed, with company registers including blockchain addresses and wallet details of DAO members. This setup ensures that actions undertaken on the blockchain by the DAO’s directors and owners hold the same legal weight as handwritten signatures.
The Marshall Islands’ Approach
The Marshall Islands, with its historical ties to American legislation, offers two types of DAO registrations: as commercial entities and non-profit companies. This jurisdiction is noted for its lower compliance burdens compared to the United States. While registration costs in the U.S. can be relatively low, around $1,000, the ongoing compliance, legal, and accounting costs can be significant, especially for commercial activities. The Marshall Islands present a more cost-effective alternative with fewer regulatory hurdles.
The Hybrid Model: Classic Legal Entities with DAO Features
An innovative approach to DAO legality involves grafting DAO functionalities onto a traditional legal entity. For example, a Singaporean company could amend its constitution to integrate blockchain actions, assigning legal relevance to these actions and detailing the blockchain accounts of shareholders and directors. This model allows the DAO to function as a multi-signature wallet for corporate funds and decision-making, blending the benefits of both traditional legal structures and blockchain technology.
Global Jurisdictions and General Partnerships
Beyond the U.S. and the Marshall Islands, there are numerous crypto-friendly jurisdictions like Singapore, Hong Kong, the British Virgin Islands (BVI), the Cayman Islands, and several European countries, particularly Estonia. These jurisdictions offer various levels of support and flexibility for integrating DAOs into their legal frameworks.
Another option is forming a general partnership, which can be established simply by creating and signing a partnership agreement. However, this method comes with significant risks, as all partners are personally liable for the partnership’s obligations. This liability extends to actions taken by any partner, emphasizing the need for trust among partners.
Conclusion
The legal landscape for DAOs is complex and multifaceted, with options ranging from direct registration in specific jurisdictions to integrating DAO features into traditional legal entities. While natural law offers an intriguing, albeit risky, approach, aligning with recognized legal frameworks provides a more secure path forward. As DAOs continue to revolutionize corporate governance and financial operations, understanding and navigating these legal intricacies will be crucial for their sustainable growth and acceptance.
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