Blockchain legal issues with DAOs

In my first article, I covered the benefits and possible problems that come with joining a decentralized organization. Today I’ll focus on some blockchain legal issues concerning DAOs.

Keeping things safe

  1. At its core, DAO was designed as an informal group of parties which operates entirely within the algorithm of its code. Theoretically, they can stay anonymous. However, it’s impossible that this code would cover every possible future case. There’s the obligations and interaction mechanisms between different DAOs and between different members and participants of the DAO. Moreover, if there’s no formalized legal structure in place for this entity, courts will impose one. A DAO most resembles a general partnership in which members/partners jointly represent DAO and are liable for its actions and obligations. The DAO may not have assets from which to indemnify third parties. So, it lacks assets or legal form. Therefore, the court could see the entity as fiction and could allow a lawsuit to proceed against individual members.
  2. A safe approach for DAO members would be to create a standard legal entity to which the DAO belongs. Every change in the DAO membership will have to be reflected in the entity membership/shareholding structure.
  3. A DAO can control cryptoassets. They can represent almost anything, including real-world assets, fiat money, valuable objects like cars, houses or precious metals. Those assets should be put under control of multisignature wallets (escrow) which DAO members have control over. Of course, proportionally to their DAO membership shares.
  4. There are initiatives in development that plan to setup “virtual jurisdiction” within which DAOs could operate. They could then cooperate with each other safely and with clearly defined rules. What’s more, they could have dedicated arbitration procedures in case of an unresolvable dispute.
  5. A DAO smart contract could also include a clause referring to a private court which specializes in smart contract disputes. It’s far better to determine preferred jurisdiction beforehand, than let a plaintiff or a government choose it afterwards.

blockchain legal issues

Blockchain legal issues – DAO

  1. In the real world a ‘principal’ is liable for its agent’s actions. Check out agency theory for more. An individual developer or software company that created a DAO can be considered as principal in some scenarios. That principal can be held liable for the actions of the DAO (and its members) without having any control over them.
  2. Legal language is very different from procedural computer language. Usually, a software developer isn’t able to express all legal details accurately. Development of specialized smart contract law programming languages is still in its very early stages.
  3. There’s no common way, yet, to represent fiat money on the blockchain. Here’s an attempt. However, most of the traditional contracts still need to represent value using fiat money or precious metals. Possibly, Central Banks can also digitize fiat money on the blockchain. Until that happens, most of the DAOs operations will be very limited in scope.
  4. If we treat a DAO as a for-profit company, there is whole set of unanswered questions. For example:
    1. Can DAO members or DAO itself claim expenses against profits?
    2. If the DAO needs to buy a physical asset, whose name goes on the paperwork?
    3. If the DAO creates and patents intellectual property, who’s the registered owner?
    4. How a DAO can own an internet domain when domains still need to be registered to a person or company?
    5. How should taxes be paid if the DAO (or its members) make a profit?

Final remarks

Naturally, my article doesn’t constitute any blockchain legal advice. But these are certainly blockchain legal issues to consider. A DAO is definitely an interesting initiative that can fix real problems. Just make sure you’re prepared for every contingency. If you’re not sure you are – consider our blockchain training sessions. We’ll work through your problems.