Should a DAO have a legal entity?

Do DAOs have a moral reason to need a legal entity?

So first thing — many businesses, especially small ones, do not require a physical or legal presence in a country to conduct business in a country, so for the sake of this piece, we can separate international participation from specific choice of country.

Obviously, this becomes more complex as you need to hire staff, or you are operating in a country which has strict regulation around the product you are providing; but for now, lets assume the industry you are working in is digital product based, and does not have strict consumer or business regs: e.g. Viber is based in Israel, Threema based in Switerland, but they have paying international customers all over the world.

In some ways a DAO legally may be based wherever you want it to be, although countries with large numbers of free trade deals are generally going to be preferred if you do decide on the legal thing. USA/EU are good starting points.

Strictly speaking, I do not believe a DAO needs a legal entity; most problems I mention in my previous post will not actually stop a DAO from being formed (e.g. a single member getting sued for the liabilities of the entire DAO), or the problem of real world asset ownership (see Digix), which may be solved with a trustee legal entity acting on-behalf of the DAO.

Indeed, nothing physically stops you walking out into a road without looking, but if the traffic is heavy, it’s probably not a good idea. The question is really; does the DAO want a legal entity; and what is the justification for that. If the road is never driven on, step on out brother!

For me, wanting a legal entity all really comes back to one fundamental — harm.

If my DAO can conceivably cause harm to another (financial or otherwise) through decisions or actions that are directly or indirectly those of the members (voting on a proposal, writing code, peer review decisions etc) then a legal identity for the DAO is going to be helpful to protect everyone — the members, the founders and the person who came to harm.

If someone, somewhere can suffer loss in a way that may be seen as unjust — society will want a way for that person to be able to get justice. While, yes, you can start with secrecy/anonymity to avoid dealing with that; except in niche cases, that does not really make a scaleable company.

As early adopters, we should want DAOs to be trusted and used by everyone — to be able to operate in a transparent and more honest fashion than the businesses we are trying to replace are. We do not achieve that by hiding, or making an entity harder to sue because doing the legal thing is difficult or seems old school. If we want to revolutionise the global system of business, it must be compatible with the global system of justice as it is today.

If yes — what legal entity, and where?
Hard to answer. Threema chose Switzerland for reasons of privacy and security. They could have been based anywhere, but they chose a jurisdiction because it best favoured their business model. The real problem with a company is that it also becomes a single point of failure for a DAO, which is what the DAO system is partly built to avoid, and I don’t really have a good answer for that yet. Do you build a fail safe system into the DAO so that the legal entity can be killed if a court orders it to be killed? What is the moral and legal implications if we do not add such a system? What if someone decided to create a DAO to specifically be malicious? If it is completely de-centralised, how do we make sure it cannot run rampage?

Narrowly — I think we should think about having open standards of DAO incorporation that include the ability to administer a real legal entity, so that DAO creators of the future do not have to agonise about how to create such an entity. At base this will be some sort of smart contract that enforces the letter of the law (with regards to corporate governance etc) on the DAO for the jurisdiction it has chosen

Broadly — I think that it may make sense for there to be the development of fundamental DAO governance principles, much like Asimov’s three laws of robotics, to stop DAO’s from being able to be purposefully harmful.