Understanding DAOs and its Legal Liabilities

In a world where technology and innovation are driving the future, it's no surprise that the legal landscape must adapt to accommodate new entities.?

Decentralised Autonomous Organisations (DAOs) have emerged as a rapidly growing force in the crypto-sphere, with their treasuries exploding from $400 million to an estimated $12.5 billion in just two years. However, the legal status of DAOs remains somewhat of a mystery, leaving many questioning their place in the legal system. That's why the recent announcement by the UK Law Commission to begin a scoping study into DAOs is such an exciting development. This review will shed light on how these organisations can be treated under UK law and further the country's efforts to become a global cryptoasset technology hub.?So, what exactly are DAOs, and can they be parties to a claim? Let's dive in and find out.

Understanding DAOs

DAOs are a type of joint enterprise in the crypto-sphere that operate without a central command structure. Instead, decisions are made through a consensus of the members of the DAO towards a common goal. DAOs can be thought of as a company with voting buttons instead of a board of directors.

DAOs are built on a complex web of smart contracts that determine their decision-making structure. Voting rights are often conferred by cryptocoin ownership, and the more one owns, the greater their say in the future direction of the DAO. All voting mechanisms are predetermined by the smart contract, which acts as the DAO's constitution. Most DAOs follow an open-source set of smart contracts on the Ethereum blockchain, which are modified to suit the specific needs of the DAO. Coin holders in DAOs are akin to shareholders, owning a proportional share of the DAO and corresponding voting power.

Unlike a traditional company, DAOs usually have minimal or no delegation of decision-making to an executive board. While some have committees to carry out various functions, these usually do not exercise high degrees of autonomy and only execute on the decisions of the majority. Voting can cover a wide range of areas, from governance and economic trajectory to hiring contractors for specific tasks or implementing new features into products.

Not all DAOs are structured in the same way, and some may operate more like an online members' club whose decision-making is made through a specific forum or social media channel. However, these types of DAOs tend to have less sophisticated and economically active voting systems, reducing the likelihood of disputes arising.

In summary, DAOs are a relatively new entity in the crypto-sphere that operate through a consensus of its members towards a common goal. Their decision-making structure is built on smart contracts, and voting rights are determined by cryptocoin ownership. Unlike traditional companies, DAOs usually have minimal delegation of decision-making to an executive board, and voting can cover a wide range of areas. While there may be variations in DAO structures, they all have in common a decentralized and democratic decision-making process.

DAOs and Partnerships: Understanding the Legal Implications

Disputes involving crypto and metaverse companies are becoming increasingly common, especially in relation to intellectual property. The explosion of parodies of famous trademarks, irreverence and hype often translate into significant boosts in sales, fuelling trade mark infringement in a digital context. As the interest and money being poured into the metaverse continue to grow, many cases of patent, trade mark, copyright, and design infringement are expected to follow.

Metaverse organizations, including DAOs, have a significant interest in figuring out how to protect their intellectual property in a digital setting. Copycat products and fake coin scams, in particular, can cause significant damage to a metaverse brand, especially as trust and transparency are considered crucial in the industry.

Understanding how to bring a claim against a DAO or on behalf of a DAO can be tricky. The first thing to consider is understanding the DAO's structure and how a claim can be brought; otherwise, service may not be valid. However, the main issue around pursuing a DAO is figuring out who to take action against.

From a legal standpoint, figuring out precisely what a DAO is appears to be a tricky question, and there currently is no clear answer. Generally speaking, a DAO is unlikely to be a company since its limited constitutions and decentralized structure mean they are not compliant with the UK's Companies Act and, therefore, cannot register in the UK. However, some states in the US allow certain DAOs to register as limited liability companies. While take-up within the sector has been poor since it is seen as going against the grain of Web3's decentralized ethos, this is still worth investigating in the first instance.

Under UK law, one current legal uncertainty is whether coin ownership can amount to an intention 'to make a profit.' This will depend on the structure and purpose of the DAO. For DAO investment clubs, the activity itself may make a strong case that they are acting as a partnership. Where DAOs confer voting rights without ownership rights, then those structures seem less likely to be partnerships. The decisions made by DAOs in their own right also have unclear legal implications.

In conclusion, bringing a claim on behalf of or against a DAO could be tricky, but it is becoming increasingly inevitable if you are considering expanding your business into the crypto space. Therefore, due diligence should include assessing how you might recover your losses if things go wrong. On the other side of the coin, new start-ups electing to operate as DAOs will need to know exactly how they can bring legal proceedings should their valuable IP be misappropriated.

Experts’ Comment

Understanding the legal status of DAOs remains an uncertain area, making context a key consideration in any dispute involving a DAO. Members of a DAO must carefully structure their organization to ensure ease and speed of initiating proceedings in cases of egregious or fraudulent infringement of intellectual property rights.?

As a first pre-action step, a thorough investigation into how the DAO operates and its relationships with other companies or wrappers should be undertaken. Thankfully, much of this information is readily available online due to the transparent nature of web-3. Getting legal advice early on in a dispute can be particularly helpful in knowing what to look for.

When contracting with a DAO, leveraging the smart contract in your favor can help avoid payment disputes. If your transaction auto-executes with the DAO paying, you can insist on receiving all payment upfront to mitigate any risk.

Despite the uncertainty around the legal status of DAOs, it is important to keep in mind that there may be a resolution in the future. It could be established through a brave party taking the issue of partnership to court, the Law Commission's study, or future legislation giving DAOs their own legal personality.?

However, until such a resolution is reached, it is essential to exercise caution when engaging with DAOs and to seek legal advice to protect your interests.