UK Law Commission Addresses Legal Characterization of DAOs

The UK Law Commission has released a scoping paper addressing the potential legal characterization of Decentralized Autonomous Organizations (DAOs) in the country.

DAOs are blockchain-based communities created for a shared goal, like investing in start-ups or purchasing a historical document like the Constitution. Market observers see these organizations as the future of corporate governance.

Key Recommendations from the Paper

In the July 11 paper, the Commission highlighted how current laws might apply to DAOs and suggested several recommendations that would support their innovation in the UK.

The Commission noted no immediate need for a DAO-specific legal entity in England and Wales. This stance arises from the lack of clear parameters defining DAOs’ structure and operations.

The paper’s central thesis lies in the argument that,

“There is no consensus on what a DAO is, how it should be structured, or what a DAO-specific entity could or should look like.”

Commissioner for Commercial and Common Law, Professor Sarah Green, pointed out that DAOs are challenging to define and align with existing legal forms because there is “even disagreement as to what can properly be called a DAO.”

Further, the paper highlighted the potential issues of adapting existing laws to new technologies. It warned that such efforts might hinder innovation rather than support it.

“There is also a risk that in attempting to accommodate a particular technological development, ad hoc and technology-specific legislation will obstruct the very dynamism it is trying to facilitate.”

The Law Commission also suggested further studies to assess the usefulness of non-profit limited liability associations like DAOs for organizations in England and Wales. Notably, a similar law in Wyoming recognizes blockchain-based DAOs as legal entities.

The paper identifies that using code in corporate governance is already possible within UK law, but specific reforms may be required.

“The law of England and Wales already provides a range of options for structuring, which could accommodate increased use of code for governance and other activities (potentially with some targeted law reform.)”

Additionally, the paper urged the government to consider reviewing Anti-Money Laundering regulations. This would determine if distributed ledger technology could achieve the same policy objectives.

While it concluded that a DAO-specific entity is not recommended within UK law, it did state that ensuring that existing legal company structures accommodate new technologies (like DAOs) that achieve the same functional objectives as current formal requirements would be a valuable future project.

Solidifying the nature of what makes a DAO a DAO would likely address many of the concerns raised by the Commission.