Regulating the Decentralised Autonomous Organisation
21st November 2023
Dr John Picton (Reader in Law, University of Manchester) and Dr Matthew Shillito (Lecturer in Law, University of Liverpool)
Decentralised Autonomous Organisations (DAOs) are digital communities. In its classic form, a DAO will have a purpose, such as making investments and loaning funds. Alternatively, it might fundraise for a collective cause, such as a Constitution DAO, which sought to buy an original copy of the United States Constitution at Sotheby’s.
The DAO’s goal-orientated activities are governed by smart contracts, coded on a blockchain. These are self-executing, and sometimes explained by analogy with a vending machine. When money is put into a coin slot, a product such as can of coke will be automatically delivered. Similarly, a smart contract might automatically distribute profits made on investments to DAO members, or return funds to members where a fundraising project fails.
In order to participate in a DAO, members must hold special digital voting tokens. They will also set future decisions, altering the smart contracts in order to do so. Where a commercial DAO is successful – for example, it is making good investments – then the tokens will themselves become valuable and tradeable. Members selling their tokens might also profit through contract-based exchange fees.
In contrast to a traditional off-line company, a DAO has no board of directors. The token-holders are in control. Day-to-day it operates in a machine-like way through the smart contracts. This new online arrangement throws up a number of complex and fundamental legal questions.
One key legal question relates to liability. As there is no board on which to fix liabilities and duties, it seems likely that the voting token-holders are themselves responsible, at law, for the decisions of the DAO. In a large group of voting token-holders, this raises the prospect of very broad and diffuse liability.
It is also not yet clear how DAOs might be characterised at law. In a 2022 consultation paper, the Law Commission canvassed views on whether DAOs were best understood as unincorporated associations, general partnerships, trusts, or based in a principle of joint ownership between the members.
The Law Commission is right to take the issue seriously. DAOs are going to become ever more important in the online economy. Sitting on the ‘digital frontline’ their emergence presents an opportunity, just like the emergence of the limited liability company did in the nineteenth century, for academics to think through fundamental concepts. The questions they raise are interdisciplinary, relating to finance law, contract law, charity law and criminal law.
At our DAO Day, funded by the SLS Small Projects and Events Funds, we will present on ‘Regulating the Charitable DAO’. A classic example of a charitable DAO is a single-purpose fundraising group, which might raise capital for a charitable cause. A key advantage, as was seen in the case of Constitution DAO, is that if an appeal fails the members can easily and straightforwardly get their money back under contract.
But charity law also poses some problems for DAOs. Charities are not allowed to generate private profits, and a token which had a value would be contrary to that basic principle. There are also administrative questions in play, such as whether the Charity Commission would be able to enter an organisation which operated only as an online DAO on the Register of Charities in England and Wales.
We acknowledge that just because something is new that does not necessarily make it better than what went before. The traditional fundraising charity, which is a tried and tested social and legal entity, is not going to be replaced. However, fundraising DAOs do have some clear advantages. They allow groups of people from all over the world to come together very quickly and efficiently. This was seen in relation to Ukraine DAO which, shortly after the Russian attack on Ukraine in February 2022, raised $7m in cryptocurrency.
Yet raising charitable money is one thing, and using it is another. A fundraising DAO still requires an offline organisation to distribute aid. Fundraising charities might also perform better, at least where their goals are complex, where there is a socially interlinked offline board to lead the organisation and take personal responsibility when things go wrong.
All of that said, utility drives usage, and whilst that is nascent at present, it is there (with potential for growth moving forwards). There is a need for the law to respond appropriately, whether that is to help charities harness the positive aspects of the technology, or to protect them from potential harms associated with its usage.
Conference: ‘Regulating the Decentralised Autonomous Organisation’ at the University of Liverpool, Thursday 25th January 2024.