Decentralised Autonomous Organisations (DAOs) emerge as a disruptive innovation in the legal and corporate sphere, challenging traditional paradigms of organisational structures and governance. 

The concept of DAOs has developed significantly since its inception. Initially conceived as a way to automate decisions and operations in decentralised organisations, DAOs have evolved to encompass a wide range of applications and structures. Autonomy (they operate through decisions and operations encoded in smart contracts and blockchain technology), decentralisation (unlike traditional corporate structures, DAOs do not have a centralised hierarchy) and their transparency and security are cornerstones of these entities.

DAOs can be classified into several types, each with their own specific characteristics and purposes:

  1. Investment DAOs: These DAOs pool capital from their members to make collective investments. Example: “The DAO”, known for its ambitious goal of democratising investment decisions.
  2. Protocol DAOs: They focus on governing specific blockchain protocols. Example: “MakerDAO”, which manages the DAI stablecoin.
  3. Collaborative DAOs: Foster collaborative projects or decentralised services. Example: “Aragon”, which provides a platform for creating and managing DAOs.
  4. Philanthropic DAOs: They focus on supporting charitable or social causes. Example: “Giveth”, which connects donors with humanitarian projects.
  5. Collector DAOs: Specialise in acquiring and managing collections, such as art or NFTs. Example: “PleasrDAO”, known for acquiring significant digital artworks.

DAOs pose a variety of legal and regulatory challenges that arise from their decentralised and autonomous nature:

  1. Legal recognition and legal personality: Most jurisdictions do not have specific laws recognising DAOs as legal entities. This poses problems in terms of accountability, governance and capacity to take legal action.
  2. Financial regulation and compliance: In the area of investment DAOs, in particular, there is a need to address issues of regulatory compliance, investor protection and fraud prevention.
  3. Governance and operational structure: The decentralised structure of DAOs challenges conventional rules of corporate governance, requiring an innovative approach to decision-making and conflict resolution.

To integrate into the existing legal system and mitigate some of these challenges, DAOs have resorted to various legal structures, known as “legal wrappers”: (a) limited liability companies (LLCs) in the United States (Wyoming, Delaware, Vermont, Tennessee) or Marshall Islands: they allow DAOs to operate with a recognised legal structure, offering some liability protection to their members; (b) foundations in jurisdictions such as Switzerland or Panama: provide a framework for DAOs to pursue specific objectives under a formal legal structure; (c) companies and cooperatives: these structures offer alternative ways for DAOs to integrate into the existing legal framework, allowing some flexibility in their operation and governance; (d) trusts, popular in common law jurisdictions such as the UK, the Channel Islands, or Singapore.

In our environment, Malta has stood out as a leader in the regulation of blockchain technologies and DAOs. Malta’s Innovative Technology Arrangements and Services (ITAS) Act 2018 is an example of how a legal framework can be adapted to address the specificities of DAOs. Malta’s ITAS includes DAOs as “Innovative Technology Arrangements”, providing a pathway for their legal recognition and certification, which gives them greater legitimacy and clarity in their operation.

On the other hand, the COALA (Coalition of Automated Legal Applications) initiative, an organisation independent of any specific government entity or corporation, whose operation is based on the collaboration and contribution of a global network of academics, technology experts, jurists, economists and other professionals interested in the study and development of the interaction between blockchain technology, smart contracts, cryptocurrencies and legal systems, has developed a set of recommendations and legal frameworks to address the specific challenges of DAOs (Decentralised Autonomous Organisations). These recommendations focus on providing a legal framework that allows DAOs to operate effectively within existing legal systems without compromising their decentralised and autonomous principles. COALA’s Model DAO Law seeks to provide a flexible legal framework that recognises the unique nature of these entities. In this model, DAOs can obtain legal recognition and certain rights and obligations, without the need to adhere to traditional corporate rules. The COALA model emphasises the importance of functional equivalence, allowing DAOs to comply with legal requirements through technological means.

DAOs represent a fundamental change in the way we think about organisational structures and governance. Their integration into the legal framework poses significant but necessary challenges. The adaptation of existing laws and the creation of new regulations are fundamental steps in harnessing the potential of these entities. Jurisdictions such as Malta and the COALA proposals offer a way forward, balancing technological innovation with security and legal clarity. As we move forward, it is essential that lawyers, legislators and technologists work together to develop a legal environment that supports innovation and protects the interests of all parties involved.

— Enrique Aznar, Lawyer and Associated Professor at IE Law School

How to cite this post: Aznar, E., ‘Desafíos legales y estructuras de las Organizaciones Autónomas Descentralizadas (DAOs): Un breve análisis para el marco jurídico actual’, The Key of BAES, 7 de febrero de 2024, https://www.baeslegalcripto.eu/legalcripto/en/legal-challenges-and-structures-of-daos/