DAO Tokyo — The Evolving Legal Status of DAOs

The third panel of DAO Tokyo centered around the evolving legal status of Decentralized Autonomous Organizations (DAOs). The discussion underscores the complex and multifaceted nature of DAO incorporation, showcasing a range of perspectives and highlighting both the opportunities and challenges associated with establishing legal frameworks for these novel organizations.

Ultimately, finding the optimal legal path for a DAO requires a nuanced approach, balancing the core principles of decentralization with the practical necessities of operating in the real world. This ongoing conversation emphasizes the importance of collaboration, community engagement, and ongoing dialogue with regulators to create a supportive legal environment for the continued growth and evolution of the DAO ecosystem.

Panelists

Panelists, from left to right: Adam, Nicolas, Anthony, Jim

• Adam Miller: Co-founder and CEO of MIDAO Directory Services, which developed an approach specifically tailored for DAOs in the Marshall Islands.
• Nicolas Biagosch: Co-Initiator of the Q Protocol, a governance framework for Web3.
• Anthony Leutenegger: CEO of Aragon, a pioneer in DAO frameworks.
• Jim Maricondo: CMO of Borderless.company, a Japanese project aiming to facilitate legally compliant DAOs in Japan and beyond.

Key Takeaways

The key takeaways and recommendations for navigating the evolving legal landscape of DAOs emphasize the need for pragmatism, careful planning, and adaptation.

• No One-Size-Fits-All Solution: There is no universally applicable legal framework for DAOs. Each project should assess its unique needs, goals, and stage of development to determine the most appropriate approach.
• Clarity and Transparency: Honesty and transparency regarding governance structures and decision-making processes are crucial for navigating regulatory landscapes and building trust with stakeholders.
• Strategic Decentralization: Decentralization should be a deliberate and well-planned process, implemented strategically to align with the project’s goals and regulatory considerations.
• Seek Expert Guidance: Engaging experienced legal counsel and advisors specializing in DAOs and Web3 is essential for navigating complex legal frameworks and minimizing potential risks.
• Continuous Learning and Adaptation: The legal landscape for DAOs is constantly evolving. Projects should stay informed about new developments, engage in ongoing dialogue with regulators, and adapt their legal frameworks accordingly.

Highlights

The Necessity of Legal Wrappers: A Spectrum of Opinions

The discussion commences by exploring the fundamental question: do DAOs need legal wrappers? The panelists offer nuanced viewpoints based on their diverse experiences and philosophies, revealing a spectrum of opinions rather than a definitive answer.

Adam advocates for the use of legal wrappers, emphasizing the inherent legal risks associated with collective activities in almost all jurisdictions worldwide. He explains that by default, individuals engaged in a DAO could be held personally liable for any liabilities incurred by the DAO, exposing their personal assets to potential legal claims. Legal wrappers, like the DAO LLC established in the Marshall Islands, provide a liability shield, separating the DAO’s actions from its members’ personal finances, similar to traditional companies.

Furthermore, legal wrappers offer practical advantages, including:

• Tax optimization: Preventing members from being personally liable for the DAO’s tax obligations.
• Facilitation of Web2 interactions: Enabling the DAO to open bank accounts, sign contracts, and engage in traditional financial activities.
• Enhanced credibility and trust: Providing a recognizable legal framework for stakeholders, facilitating interactions with traditional businesses and institutions.

Adam argues that creating a legal entity for a DAO mirrors the standard practice for traditional startups seeking liability protection and operational functionality.

Nicolas expresses a more cautious stance towards legal wrappers, presenting a vision of DAOs operating in a borderless, digital economy independent of nation-states. He views legal wrappers as potentially conflicting with the decentralized nature of DAOs, tying them to specific jurisdictions and imposing external governance structures that could undermine the DAO’s autonomy.

Nicolas acknowledges the pragmatic benefits of legal wrappers, especially in facilitating real-world interactions and offering operational clarity. However, he suggests exploring alternative legal frameworks that recognize the unique characteristics of DAOs without compromising their fundamental principles. He highlights the Q Protocol’s approach, which establishes a private contract (constitution) among DAO members, outlining governance rules, liability frameworks, and dispute resolution mechanisms, potentially independent of any specific legal jurisdiction.

Navigating the Legal Landscape: Jurisdiction Considerations

Recognizing the complexity and lack of clarity surrounding DAO legalization, the panelists delve into the various jurisdictional options available, highlighting their strengths and weaknesses.

Adam champions the DAO LLC in the Marshall Islands as a solution specifically designed for DAOs and Web3. He recounts his experience searching for a suitable legal wrapper, encountering limitations in existing frameworks that clashed with the decentralized vision of his DAO.

The Marshall Islands’ DAO LLC offers several advantages:

• Flexibility and autonomy: No mandatory board of directors or managers, allowing for decentralized governance structures.
• Anonymity: No requirement to disclose names and addresses of members, preserving privacy.
• Web3 integration: On-chain record-keeping and accounting allowed, streamlining operations and minimizing bureaucracy.

Adam acknowledges the prevalence of traditional jurisdictions like the Cayman Islands, Switzerland, and Delaware for crypto projects, attributing it to familiarity, legal precedent, and existing infrastructure. However, he believes the Marshall Islands’ offering provides a more tailored and adaptable solution for truly decentralized DAOs.

Nicolas emphasizes the Q Protocol’s ability to establish a jurisdiction-agnostic legal framework, allowing for internal organization and liability definitions without immediate reliance on external legal entities. This framework, incorporating a constitution and dispute resolution mechanisms through the ICC Court of Arbitration, creates a legally recognized structure that can potentially interact with various jurisdictions without being bound to one specific location.

Nicolas acknowledges that legal wrappers might become necessary at later stages, depending on the DAO’s activities and growth. However, the Q Protocol’s initial framework allows for flexibility and minimizes the risk of premature legalization compromising the DAO’s decentralized nature.

Jim sheds light on the recent developments in Japan, where a new DAO LLC framework was introduced in April 2024, signaling a progressive approach towards DAO legalization. While still in its early stages, this framework aims to facilitate legal compliance for DAOs operating in Japan, potentially paving the way for wider adoption and recognition in the future.

Jim explains that Borderless.company is building a platform to simplify the process of establishing DAOs under this new framework, focusing on reducing operational friction and enabling legally compliant fundraising through digitized equity tokens. He acknowledges limitations, such as the current requirement for members to reside in Japan, but emphasizes the potential for future expansion and internationalization.

Avoiding Pitfalls: Common Mistakes and Legal Nuances

The panelists share their experiences and insights regarding common pitfalls and potential downsides associated with DAO incorporation, emphasizing the importance of thoughtful planning and strategic decision-making.

Anthony highlights the prevalent pitfall of projects decentralizing prematurely, often driven by a fear of regulatory scrutiny or a desire to capitalize on market trends. He cautions against launching tokens before achieving product-market fit and neglecting legal considerations in the rush to decentralize.

Anthony emphasizes the importance of due diligence, legal counsel, and clear goal-setting before embarking on the legalization process. He argues that projects should honestly assess their stage of development, consider their objectives, and determine the appropriate legal approach accordingly.

Anthony further points out the risk of legal wrappers burdening projects with excessive bureaucracy, diverting resources and energy away from crucial product development and user engagement. He warns that premature incorporation can trap startups in complex legal processes, hindering their agility and ultimately impacting their success.

Nicolas cautions against viewing legal wrappers as a “silver bullet” that automatically solves all regulatory challenges. He emphasizes the need for transparency and a genuine commitment to decentralization, warning against superficially adopting decentralized structures while retaining centralized control in the background.

Nicolas recounts his experience with Q Protocol, where regulators prioritized understanding the organization’s governance structure and ensuring the absence of centralized control mechanisms before granting regulatory clearance. He stresses that transparency and authentic decentralization are crucial for building trust and achieving long-term regulatory acceptance.

Adam acknowledges the pervasiveness of off-chain governance mechanisms like Snapshot combined with multi-sig wallets in the DAO space. While not truly decentralized, he suggests that legal wrappers can potentially be utilized to enforce the execution of community votes by multi-sig signers, aligning their actions with the DAO’s wishes and mitigating the risk associated with centralized control.

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