Summary: The DAO Model Law

Written by Jack Deeb

On 19 June 2021, the Coalition of Automated Legal Applications (COALA) published the Model Law for Decentralized Autonomous Organizations (DAOs), otherwise known as the DAO Model Law.

What is the DAO Model Law?

COALA (which includes members from Harvard Law School, Ethereum Foundation, BNP Paribas and MakerDAO) has been working on the DAO Model Law since it was first announced on 19 December 2019.

In 2019, COALA described an increase in use of non-territorial DAOs on blockchains and a decrease in legal certainty as to how these DAOs, and their underlying projects, would be dealt with at law.

Exactly 18 months later, COALA has published its DAO Model Law: a transnational legal framework for DAOs, which aspires to become the foundational document of best practices for developers, administrators, members and participants of DAOs. The Model Law is drafted such that its provisions are suitable for States to adopt into their own legislation.

COALA is a unique, collaborative, global and multidisciplinary community that brings together individual experts in the decentralized ecosystem to explore the implications and deployment of blockchain technologies.

The Model Law acknowledges the two types of DAOs currently seen on blockchains: registered DAOs and unregistered DAOs (often referred to as “wrapped DAOs“ and “unwrapped DAOs”, respectively), and provides a path forward for unregistered DAOs. This serves as an alternative approach to the developments recently seen in Wyoming for registered DAOs, which allow DAOs to register in Wyoming. Given that the vast majority of existing DAOs are unregistered, the Model Law is a significant step towards resolving legal uncertainty for DAOs.

How will the DAO Model Law be implemented?

When the Model Law is ratified by a State, DAOs within that State will be recognised as legal entities with limited liability. Even within the local laws of non-ratifying States, the Model Law will provide some recognition and protection to DAOs under private international law principles.

11 Formation Requirements for a DAO

The core of the DAO Model Law is 11 technical and governance requirements that a DAO needs to meet to benefit from legal personality and limited liability. The 11 requirements are:

1. the DAO must be deployed on a public blockchain;
2. the DAO must provide a unique public address through which anyone can review the DAO’s operations;
3. all code of the DAO must be open sourced;
4. all code of the DAO must be audited;
5. there must be at least one interface allowing laypersons to read key variables of DAO smart contracts and token restrictions (if any);
6. the DAO must have by-laws that are comprehensible to a layperson;
7. the governance system of the DAO must be technically decentralised;
8. there must be at least one DAO member at any given time;
9. there must be a publicly specified mechanism that allows a layperson to contact the DAO;
10. the DAO must have a dispute resolution mechanism that the DAO and it’s members and participants are bound by; and
11. the DAO must have a dispute resolution mechanism to resolve disputes with third parties that are capable of being settled by alternative dispute resolution.

On page 18 of the DAO Model Law report, you will find the 11 Formation Requirements.

11 other things worth knowing

Other things you should know about the DAO Model Law report are:

1. it suggests that States might authorise a regulator to monitor whether a DAO continues to meet the 11 requirements for legal personality;
2. it strives to maintain the pseudonymity of DAO members and participants;
3. it sets out the potential actions that may lead to DAO members forfeiting limited liability protection;
4. it clarifies that minimum capital requirements are not mandatory for DAOs;
5. it provides a high degree of discretion to DAOs in how they establish their organisational, governance and capital structures;
6. it makes clear that merely holding a position or decision-making power within a DAO is not in itself sufficient to imply fiduciary duties;
7. it specifies that general business organisation law should be applied to DAOs by a ratifying jurisdiction where lacunae remain after the application of the Model Law and any DAO by-laws;
8. it promotes the recognition of DAOs as pass-through entities for tax purposes, similar to the tax treatment of most trusts in Australia;
9. it recommends that, if a DAO refuses to comply with an enforceable judgment, the DAO members who voted against compliance will be liable for any monetary payments ordered in proportion to their share of governance rights in the DAO;
10. it clarifies that recipients of governance tokens via airdrops are not, without more, DAO members; and
11. it resolves that, in the event of a hard fork, legal recognition and asset ownership will follow the majority chain (unless decided otherwise by the DAO).

Read the DAO Model Law

Find the full DAO Model Law report here.

https://mycelium.xyz/