Where is DAO legal?

This article contains an international comparison of some of the legal forms that could be considered when initiating a DAO. To limit the liability of users, it is advisable to create a secure legal framework when setting up a DAO by deliberately choosing a corporate form. In practice, various options have become established internationally.

Wyoming DAO LLC

In the US state of Wyoming, a special legal form for a DAO has been created. Since 2021, it is possible to form a DAO as a Limited Liability Company (“LLC”) due to an appendix to the LLC Act (Fleischer, ZIP 2021, 2205, 2209 f.). The LLC is a hybrid form of a company that has characteristics of a partnership and a corporation. A DOA formed as an LLC has its own legal personality. It can therefore acquire its own rights and incur liabilities. In principle, the LLC is liable for these and not the users of the DAO. This should be a considerable advantage. The DAO LLC may pursue economic or idealistic (also non-profit) purposes. A special feature tailored to the DAO is that the articles of association of a DAO LLC can determine whether the DAO is managed by the members or by the algorithm (Fleischer, ZIP 2021, 2205, 2214.). However, the choice of the legal form of a DAO LLC is also accompanied by consequential obligations, such as the fact that a DAO must have a permanent representative in Wyoming.

Switzerland

Switzerland is one of the leading locations in the area of distributed ledger technologies and blockchain, is fundamentally open to technological innovations and strives to create innovation-friendly framework conditions (Federal Council report of 14.12.2018, Legal foundations for distributed ledger technology and blockchain in Switzerland, p. 8.). Therefore, some DAO projects, such as the Ethereum Foundation, have already chosen Swiss law to create clear legal structures (https://www.fundraiso.ch/sponsor/stiftung-ethereum). In Switzerland, the most popular legal forms for setting up a DAO are the association or the foundation (Expert Focus Spezial, March 2022, p. 19 f.). An association is an union of several persons who jointly pursue an ideal purpose. The association’s assets are exclusively liable for liabilities incurred by the association (Art. 75a Swiss Civil Code). The liability of the users of a DAO is therefore also limited, which is an advantage. The main bodies of the association are the general assembly and the board. The general assembly is the governing body of the association and consists of the members of the association. It appoints the board and decides on the admission and exclusion of members. In particular, the joint management by all users of the DAO corresponds to its structure. A disadvantage of an association, however, might be that it is only allowed to pursue idealistic purposes. A foundation also has its own legal personality and is therefore liable for the obligations it enters into. Hence, the liability of the users is also limited. The foundation assets must be dedicated to a specific purpose. Unlike an association, this purpose does not have to be idealistic. However, only non-profit foundations are tax-privileged. The purpose of the foundation can only be changed to a very limited extent. This can help to strengthen confidence in the decentralization of the network. At the same time, however, this could lead to the foundation being perceived as a rigid construct that may not be able to react appropriately to technological innovations. In addition, compliance with the foundation’s purpose is monitored by a supervisory authority, which can make it even more difficult to act quickly and flexibly (Schauwecker, Steuer Revue 73/2018, 932, 936 f.).

Marshall Islands

The Marshall Islands have also enacted regulations specifically tailored to a DAO. According to these, a DAO can be established as a non-profit company in the form of a limited liability company that is managed by its members. In principle, such a company is formed in accordance with the generally applicable company law of the Marshall Islands, but it has some special features. For example, the company’s earnings cannot be distributed to the members or the management (https://www.midao.org/). This should be taken into account in particular for DAOs that pursue a financial investment objective. When initiating a DAO, different legal systems and legal forms can be chosen, each with its own advantages and disadvantages. Our team will be happy to advise you on the questions that arise in this context.