DAOs: Law 101

The recent news that Ooki DAO members had been served by the CFTC via chatbot was met on crypto Twitter with a collective round of indignant eye-rolling and disbelief.?

Surely, the CFTC can’t be serious in bringing a complaint against every individual member of a DAO? Especially in a case about something as niche as operating an unregistered commodity exchange.

But, I don't know: If a DAO is not incorporated, what’s the alternative?

With stocks, you bear no personal responsibility for either the debt or malfeasance of the companies you own shares in — that’s because those companies are incorporated, most likely as a C-corp.

C-corps limit liability by creating a separate entity that has no direct control over a company other than appointing the board of directors.

As a result, being a shareholder of Enron did not make you an accomplice to their accounting crimes.?

(In fact, it made you a victim, and you were able to sue and get some money back from Enron’s bankers.)

With DAOs, however, it’s not so clear.

If DAOs are a new way to organize people and a bunch of people organize to do something illegal, why shouldn’t they be held responsible?

Somebody has to be, and that somebody would normally be the corporation — because corporations are people, too (as we learned in the 2010 ruling on Citizens United v. Federal Election Commission).

With stocks, that corporate somebody is our fall guy: Corporations can be sued for debt, damages, or restitution, just like a person.

But most DAOs are not incorporated, so there’s no one to take the fall for us.

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Speedrunning the History of Corporate Law

This is, of course, an overly simplistic take on a nuanced legal topic that’s only starting to be hashed out, largely on Twitter.?

A lot of that Twitter legal advice appears to be bad (or at least conflicting), which I guess is unsurprising in an all-new area of debate: No one has a post-grad LLM in crypto law, so most legal advice comes from experts in adjacent fields like tax or corporate law — which may be akin to taking advice on heart surgery from a podiatrist.?

Or, even worse, taking advice on anything at all from a newsletter writer.

It’s early. And it’s far more complicated than all the Twitter hot-takes would have you believe (as evidenced by this 36-page paper from David Kerr and Miles Jennings on the legal framework for DAOs.)

But you don’t have to be a crypto lawyer to understand that the way DAOs are currently being employed is unsustainable.

DAOs are being used like a Saul Goodman gimmick to skip past the entire history of both corporate and securities law: Founders can retain full control of their protocol with a multi-sig, raise money without issuing a prospectus, sell “equity” that has no claim on assets or cash flows, follow no state’s rules, pay no taxes, and have no liability.

Whatever its merits (or demerits), the CFTC’s complaint against Ooki shows that this was overly optimistic.

It shows also just what a terrible deal being a token holder of a DAO usually is: You get none of the rights of a shareholder and, potentially, all of the liabilities of a partner.?

It’s a lose-lose.

Closing Argument

The limited-liability corporation has been one of the great drivers of human progress — the means by which we’ve raised the vast sums of capital required to harness the benefits of the industrial revolution.

Many hope DAOs are the next big advance in human organization and the next driver of human progress.

If so, it’s not going to be simply a cheat code that allows us to bypass centuries of corporate law: If DAOs are going to be big, they will have to find their place within the legal system.?

We are now in the regulation-by-enforcement stage of that process — which is like driving on a highway with no speed-limit signs: The only way to find out if you’re going too fast is to get a ticket.

Ooki has been pulled over for speeding, and the CFTC will now attempt to set the speed limit by making an example of them.

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Unlike the Union Turnpike Corporation, I don’t think Ooki will have to spring their token holders from the jail yard by suing the CFTC for false imprisonment.?

But if we want to limit our liabilities, we will have to play by the rules — whatever they turn out to be.