With the rise of legal status, how can DAO get out of the “utopian dilemma”?

On the afternoon of March 1, U.S. time, the Utah State Legislature narrowly passed the HB 357 bill – “Decentralized Autonomous Organization Amendment” after intense discussions. This marks that DAO has obtained an independent legal entity status in the United States as an organizational form.

DAO (Decentralized Autonomous Organization) is a decentralized autonomous organization. It is a governance structure or organizational form. The structure of traditional organizations is hierarchical from top to bottom. Goals and tasks are distributed layer by layer, and members get paid for completing tasks. , belonging to the pyramid pattern. DAO is a group of people who have the same consensus and participate in governance through proposals, voting, rewards, etc., using Token rewards to achieve incentives, emphasizing fair interest distribution, and no power center, all members can exercise power equally environment.

DAOs have no clear legal entity until 2021

Before 2021, DAO organizations do not even have any particularly good options and space to establish legal companies. Individual states or countries will require DAOs to make too many compromises even if they allow DAOs to register as legal entities. For example, they would require the DAO to keep a list of members’ full names and addresses, elect a board of directors or trustees with authority over the organization, and keep written records of meeting decisions.

First of all, we need to know that if an organization is not registered as a legal entity in the United States, it will basically not be recognized by the government. Much of the modern economy depends on organizations gaining legal status. For a traditional business or organization, whether large or small, for-profit or not-for-profit, one of the first things to do is create a legal entity for the organization, usually in the form of a corporation, foundation, or limited liability company (LLC). form. A problem here is that if a group of people engage in a joint business without a legal entity, US law regards them as a general partnership system. What are the problems with DAOs considered as general partnership systems?

  • In a general partnership, the participating individuals are individually responsible for the actions of the organization and the actions of the other participating individuals. Therefore, innocent individuals involved are vulnerable to fraud, hacking, or accidents in the DAO.
  • Legally, a general partnership does not have the status of a legal person. While most DAOs at least want to own the intellectual property of their logo and trademark, that means it can’t sign contracts to do things like open bank accounts, buy and own property, sue and be sued, or hire staff.
  • Tax issues, when the general partnership makes money, the individuals involved in the organization are subject to personal taxes on those earnings. If you own 10% of a general partnership, you pay taxes on 10% of the organization’s profits. The same is true for DAOs.

After 2021, DAO is incorporated into the limited liability company system

On April 21, 2021, the Governor of Wyoming signed DAO-focused Bill 38, making Wyoming the first state ever to recognize DAOs as LLCs (effective July 1, 2021).

In February 2022, the Republic of the Marshall Islands passed a law “The DAO Act of 2022”. The DAO Act of 2022 will allow DAOs to be established as limited liability companies (LLCs.), allowing them to be recognized as DAOs limited liability company. The bill also intends to allow for-profit DAOs and non-profit DAOs to register, while providing definitions and regulations for the formation of DAOs, agreements, and the use of smart contracts. And enable legal entities registered in the country to formally adopt DAO structures and governance tools.

On April 6, 2022, Tennessee also passed legislation to recognize and allow limited liability companies (LLCs) to register as “DAOs,” striving to make “Tennessee the Delaware of DAOs.” According to state Rep. Jason Powell, “With this new business structure, Tennessee will become a beacon for blockchain investment and new jobs…just like Delaware became a hub for traditional LLCs or South Dakota credit card company.”

Therefore, since 2021, DAO organizations have been included in the limited liability company system, and DAO organizations can choose to contact the authorities and the legal system. The U.S. states of Wyoming and Tennessee, as well as the Republic of the Marshall Islands, have both passed bills allowing DAO LLCs, highly flexible and robust legal entities custom-made for DAOs, with all the benefits of a traditional LLC.

In addition, some DAO organizations also take the form of limited cooperative associations (LCA) and unincorporated nonprofit associations (UNA) in Colorado, or choose to create foundations in Switzerland, the Cayman Islands, or the British Virgin Islands. Since 2021, hundreds of DAOs have incorporated companies in these jurisdictions, which allows these DAOs to enter the banking business, protects their members from personal liability, and even ensures that the DAOs can solve their own tax problems.

However, this form of DAO is not pure. No matter which form is adopted, it essentially wraps an existing legal entity outside of DAO. That is to say, in the past, there was no concept of DAO at the legal level. It was an LLC, a company, a cooperative, a foundation, and a trust, but it chose the organizational form of DAO to operate.

In 2023, grant the DAO organization an independent legal entity

With the rise of legal status, how can DAO get out of the

On March 1 this year, Utah passed its DAO bill, which recognizes centralized autonomous organizations as legal persons, and all these blockchain-native organizations called DAOs will not need to wrap themselves in the existing corporate structure, that is, from benefit from legal personality. The Utah DAO Act grants legal recognition and limited liability protection to DAO organizations, addressing the limitations of the previous “limited liability company wrapper” approach.

It means that DAO no longer needs to be packaged as a variant entity of a limited liability company, and the organizational form of DAO itself has become an independent legal entity recognized by Utah law. After research by R3P0, the following content in this bill deserves attention:

  • The DAO organization has legal personality, but the DAO has limited liability, and its liability is limited to all assets of the DAO. Among them, the individual members do not bear the responsibility, and in special cases, the responsibility is divided according to the size of the voting rights.
  • Created a clearer and more nuanced tax treatment consistent with current DAO functionality. Propose new tax language. Tax Complexity Compliant with DAOs (Section 48-5-406(1) of the Act) If a DAO recognized under this Act is eligible to elect to be classified as a corporation for federal tax purposes, and the DAO makes that election , the DAO shall comply with Chapter 7 of Title 59 of the Corporate Franchise and Income Tax Act.(2) (a) Unless the DAO elects as described in subsection (1) , otherwise a DAO recognized by this Act shall be classified as a partnership for tax purposes and shall be subject to Section 59 of the Pass-Through Entities and Pass-Through Entity Taxpayer Act Subject to the provisions of Part 14 of Part 10 (b) for taxation purposes, the DAO shall allocate to the DAO an allocated share of the income, gains, losses, deductions and credits arising from the activities of the DAO For each member of the entity, the member’s membership interest in the entity is prorated.)
  • Provides that DAO participants have no implied fiduciary responsibilities unless those responsibilities are expressly stated as applicable.
  • Use “bylaws” (rather than operating agreements) to protect DAO ownership/anonymous editing and safeguards for participants.
  • A technical gatekeeping feature was incorporated to ensure that the DAO is indeed a DAO.
  • DAO has no administrator, and all members are regarded as joint administrators. And all governance token holders will be regarded as DAO members (which regulates the division rules)

In short, Utah proposes a more robust and targeted compliance framework where LLCs are not DAOs and DAOs are not LLCs. Utah’s bill clearly defines the difference between the two, meaning DAO participants have more clarity and protection to experiment and innovate. The bill’s effective date is set for 2024. According to the Utah Legislature: We made this compromise to give us another year to edit, tweak and make sure the actual implementation of the bill passes.

Where is the next step for DAOs?

Will the formal inclusion of DAO in the legal system make it lose its “centralization”?

A common concern for many DAO organizations when considering forming a company is whether legal compliance will make their DAO less decentralized, thus going against the core values ​​of Web3. But in fact, without legal compliance, people often use “decentralization” to make DAO a tool for people to do evil.

At the end of last year, in the case of CFTC suing OokiDAO, the purpose of bZeroX to transfer the control of bZx protocol (now Ooki protocol) to bZx DAO (now Ooki DAO) is to try to make bZx DAO not be enforced due to its decentralized nature. . The founder of bZx tried to use the decentralized nature of DAO to evade legal sanctions.

The spirit of “decentralization” is always respected by the WEB3.0 community, but in many cases, never underestimate the evil of human nature. With the passage of the Utah DAO Act, DAO now has the status of a formal legal entity. While regulating regulation, it is actually protecting the members of the DAO organization. It is worth noting that many details in the new bill show respect for “decentralization”, and there are not too many restrictions on the coordination mechanism and decision-making mechanism within the DAO organization. This is undoubtedly a commendable attitude towards new things, embracing innovation, but refusing to grow wildly.

The revival of the DAO is imminent

The past year – from Celsius Network to FTX Thunderstorm – has been a wake-up call, showing the need for decentralization of assets and decision-making, which will surely lead to a DAO renaissance. With the continuous innovation of blockchain technology, DAO tools will make the future application of DAO more streamlined and more efficient. For example, governance, proposals, and voting are important components of DAO. With nearly a million active voters and proposers, you need the right tools to ensure fairness and efficiency. Second, the DAO treasury is the lifeblood of every DAO, giving it the fuel it needs to achieve its goals. Therefore, to ensure efficient and secure governance, you must use high-quality tools to prevent hacks and errors – especially when you interact with DeFi protocols.

With the rise of legal status, how can DAO get out of the

In the not-too-distant future, participating in a DAO may be as smooth and frictionless as interacting with social software. But one of the prerequisites to reach this next level is the necessary integration with the existing legal system. On the other hand, the continuous innovation and progress of DAO technology will also help DAO to mature and integrate with other parts of the global production economy. Legislative compliance is the basis and soil for DAO to stand in reality, and technological innovation breakthroughs are the nourishment. With the continuous improvement and progress of the DAO Act, legal compliance in the true sense will be realized, and DAO participants will have clear rights and responsibilities, and clear tax regulations. Let people’s worries about the inaccuracy of the DAO structure in the actual life operation system gradually dissipate, so that more and more people may gradually adopt the DAO organizational form as the company structure in the future visible to the naked eye, and the revival of the DAO will no longer be just a dream. Talk on paper.

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Disclaimer: There are risks in the market, and investment needs to be cautious. Readers are requested to strictly abide by local laws and regulations when considering any opinions, viewpoints or conclusions in this article. The above content does not constitute any investment advice.

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