At the forefront of innovation, Decentralized Autonomous Organizations (DAOs) are reshaping traditional organizational paradigms. Defined as decentralized networks of autonomous entities that optimize production functions, DAOs harness the power of the network effect to foster open collaboration and resource sharing. At their core, DAOs are envisioned as entities governed solely by intelligent algorithms or autonomous agents, ensuring both information autonomy and tamper detection.
DAOs have emerged as disruptive structures that offer numerous advantages over traditional organizational models. These benefits range from increased transparency and accountability to decentralized governance and cost-effectiveness.
However, these benefits should not obscure the fact that the majority of DAOs operate without a formal legal entity or any form of regulatory oversight. The fact that a DAO does not have a legal wrapper is initially questionable for liability reasons. Token holders are personally liable for material and immaterial damages caused by the DAO. This weakens trust in decentralization. In addition, unregulated DAOs pose an incalculable risk to investors. The inability to raise capital directly affects the likelihood of the DAO's success and survival, as well as trust in the DAO.
This is the motivation for the team at Pontinova to create the Pontinova Global Top 100 DAO Report and this Legal Guide covering the top 7 jurisdiction for DAO legal wrappers:
• Switzerland - Foundation and Association
• Liechtenstein - Foundation
• Lithuania - Private Limited Liability Company
• Marshall Islands - DAO (Non-Profit) Limited Liability Company
• Cayman Islands - Foundation
• British Virgin Islands - Limited Liability Company
• Abu Dhabi ADGM - Distributed Ledger Technology Foundation
This DAO legal guide covers for each jurisdiction a regulatory compliance framework and analyzed in terms of DAO type, token, and legal wrapper. But before you delf in the jurisdiction reports, take a moment to make yourself familiar with the methodology of DAO type, token, and legal wrapper.
Download the Pontinova DAO ReportDAO-Type Classification
According to DeepDAO, there are 2’375 DAOs with over USD 16 billion in assets under management and more than 7.5 million token holders (as of October 17, 2023). CoinMarketCap estimates that there are 8’885 listed DAOs (as of October 17, 2023) and Snapshot speaks of more than 27’000 DAOs.
This discrepancy underscores the difficulty to get an overview of the exact number of DAOs. This is also true for the types of DAOs. They range from DAOs that help manage some of the largest cryptocurrency protocols and invest in ecosystems, to smaller DAOs that cater to social communities, media, and philanthropic activities.
From this wide range of potential use cases, we have identified the three most common types of DAOs: the Investment DAO, the Protocol DAO, and the Social DAO.
Investment DAO
The Investment DAO is a type of DAO that focuses on making collective investment decisions on behalf of its members or token holders. The Investment DAO pools financial resources from participants and invests them in various assets, using smart contracts and decentralized decision-making processes to manage investment portfolios and distribute returns or profits to its members according to pre-defined rules and agreements.
Protocol DAO
The Protocol DAO, which may be described as a subtype of the Investment DAO – a clear classification or demarcation is not possible due to the very flexible design of DAOs –, is a type of DAO that focuses on managing and maintaining the underlying Protocol or infrastructure of a blockchain or decentralized network. The Protocol DAO typically involves stakeholders who have a vested interest in the technical aspects of the network and aim to ensure the security, scalability, and functionality of the protocol.
Social DAO
The Social DAO is a type of DAO that focuses on social or community-driven initiatives and projects. Participants in a Social DAO often hold tokens that give them voting rights and influence over which social or community initiatives receive funding.
DAO-Token Classification
Due to the wide range of possible applications, different types of virtual assets [VA], respectively tokens, have evolved in practice, depending on the objective. A uniform terminology for tokens has not yet been established. A clear distinction is often not possible due to hybrid design possibilities. To facilitate the readability of this Report, we have opted for a uniform token taxonomy and have excluded special cases such as Non-Fungible Tokens (NFTs).
The Report distinguishes between utility tokens, payment tokens and asset tokens. Any regulation applicable to tokens can be subsumed under either the issuance of virtual assets [VA I] or the provision of services related to virtual assets [VA S]. Services related to virtual assets include trading, exchange, custody and financial services.
Utility Token
The utility token [U], also known as a digital consumer asset, is a digital asset that provides access to digital goods and services. A subset of the utility token is the governance token. DAO governance tokens typically do not represent shares, but rather the ability for token holders to participate in on-chain voting and influence protocol updates and decisions. The fact that governance tokens may serve accessory investment purposes does not mean that they automatically qualify as securities.
Payment Token
The payment token [P], also known as a virtual asset, virtual currency, or cryptocurrency, is a digital asset that serves, now or in the future, as means of exchange or as means of payment for the purchase of goods and services. DAO payment tokens, such as MakerDAO's Dai Coin, can be issued as part of an existing platform and do not qualify as securities.
Asset Token
The asset token [A], also known as a security token, investment token, or digital security, is a digital asset that represents ownership of or a claim to physical or digital assets, such as real estate, stocks, bonds, or commodities. A subset of the asset token is the equity token. DAO equity tokens are intended to represent virtual shares. In the future, this token could be used to map shares of different legal forms and to handle them in an easily transferable manner.
DAO Legal Wrapper Classification
Jurisdictions around the world are enacting laws specifically designed for the formation of DAOs. Among these jurisdictions is the Republic of the Marshall Islands, which legally recognized DAOs as domestic non-profit or for-profit limited liability companies in December 2022 by passing the Decentralized Autonomous Organizations Act of 2022. In the fall of 2023, this Act was amended by the Parliament of the Republic of the Marshall Islands. Another example is the Abu Dhabi Global Markets, one of the most recognized free zones in the United Arab Emirates. On October 2, 2023, the Board of Directors of the ADGM enacted the DLT Foundations Regulations 2023, which will introduce a DLT Foundation for DAO purposes.
Most other jurisdictions, such as Switzerland, have not (yet) created a specific legal framework for DAOs. Instead, they allow DAOs to opt for traditional legal wrappers to comply with the existing regulatory framework. Depending on the jurisdiction, various legal wrappers have emerged for DAOs.
Association
The Association is a member-based legal entity that uses assets to pursue a non-commercial purpose. The association is solely governed by its members, reflecting the values of decentralization. Each member has an influence on the management and governance of the association through its voting rights. The laws governing these associations are quite flexible, allowing for a range of governance structures, which can mirror the decentralized governance model of a DAO. This makes the association particularly valuable for on-chain transactions.
Foundation
The Foundation is an autonomous legal entity that uses its assets to pursue a non-commercial or a private or commercial purpose defined by the founder. The foundation is orchestrated solely by its purpose, as it has no members or shareholders. The structure of the foundation protects assets, aligns with the decentralized ethos of DAOs, and allows a clean interaction with traditional legal and financial systems. This makes the foundation particularly valuable for off-chain transactions and layer one token projects. The non-profit foundation can apply for tax exemption.
Corporation
The Corporation, such as a Limited or Incorporated, is a legal entity formed by its shareholders to pursue an often, but not exclusively, commercial purpose. The corporation is owned and controlled solely by its shareholders. Corporations limit the liability of the shareholders for the acts and debts of the corporation. The corporate structure can act as a "service corporation" for DAO members, providing an interaction interface with the real world. However, corporations require a level of traditional operational structure and full degree of regulatory compliance, potentially limiting decentralized decision making within the corporation, but maximizing profits for shareholders. This makes the corporation particularly valuable for on-chain transactions.
Tailoring Legal Solutions to DAO Types
Recognizing the diverse nature of DAOs and the different legal wrappers, the report introduces then a nuanced approach to legal structuring depending on the DAO type.
Investment DAOs
Investment DAOs are tailored to make collective investment decisions. They pool financial resources from members or tokenholders and invest them in various asset classes. These DAOs require a flexible governance structure, limited liability provisions, and a clear framework for financial compliance. The legal wrapper for an Investment DAO should be agile enough to adapt to rapidly changing investment strategies while ensuring compliance with financial regulations. Thus, Corporations may be the most recommended wrapper for Investment DAOs.
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Protocol DAOs
Protocol DAOs are primarily focused on thegovernance and maintenance of an underlying blockchain protocol ordecentralized network. These DAOs usually involve stakeholders deeply investedin the network's technical robustness, security, scalability, and overall functionality. Given these specific needs, Protocol DAOs often require robust asset protectionand rigorous governance mechanisms for long-term sustainability. One of the standout features of a (Swiss) Foundation, often recommended for Protocol DAOs, is its immutable structure. Once established with a specific purpose, the foundation is legally bound to adhere to that purpose, providing an added layer of protection against stakeholder pressures or market dynamics.
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Social DAOs
Social DAOs are oriented towardssocial or community-driven projects. These DAOs are generally easier to set upand require moderate asset protection. Members usually hold governance tokensthat grant them voting rights, thereby influencing which social initiatives orcommunity projects receive funding. Given their community-driven nature, SocialDAOs benefit from legal structures that are simple to establish and offerflexibility in governance, such as a (Swiss) Association.
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In an era marked by rapid innovation andincreasing regulatory complexity, Pontinova Law serves as a pioneer in FinTech and DLT law at the intersection of Germany, Switzerland, and the United Arab Emirates. Therefore, we remain committed to facilitating informed decision-making and driving the evolution of the DAO ecosystem.
Download the Pontinova DAO Report
