The Legal Status of Decentralized Autonomous Organizations (DAOs) in England and Wales
The Law Commission of England and Wales, responsible for reviewing and suggesting changes to laws in the U.K., recently addressed the issue of the legal framework for Decentralized Autonomous Organizations (DAOs).
The commission stated that DAOs might fall under existing regulations, such as the Financial Services and Markets Act 2000, which require companies to have authorization to operate in the U.K. Specifically, DAOs could be subject to regulations if they engage in certain activities related to investments.
In cases where governance tokens issued by DAOs resemble shares, grant voting rights, and are exchanged for investment, they are considered specified investments. Advertising these tokens may also be subject to promotion rules to protect consumers.
Courts in the U.S. are already grappling with the legal status of DAOs, and the Law Commission highlighted the importance of considering each DAO individually due to their unique structures and functionalities.
While the commission did not recommend a separate legal framework for DAOs in England and Wales at this stage, it acknowledged the need to determine the appropriate public law that applies to each type of DAO. Some DAOs may be viewed as unincorporated associations, where participants are liable for their own actions.
From a tax perspective, certain DAOs may be required to pay corporation tax, and the commission suggested exploring an international tax framework for DAOs.
The report also discussed the potential for litigation involving DAOs, including civil actions, regulatory enforcement, and criminal prosecution. It noted that smart contracts used by DAOs can constitute legal agreements.
Previously, the Law Commission contributed to legislation enabling the use of distributed ledger technology for trade. It also sought feedback on proposed legislation to classify cryptocurrencies as property.
Additionally, the report recommended further analysis by bodies like the Jurisdiction Taskforce on when fiduciary duties could apply to software developers involved with DAOs.