What Is a DAO and Where Do They Sit in the Australian Corporate and Legal Landscape?

by Robert Chen, Lawyer for LegalVision

The advent of DAOs is a natural progression of society’s use of blockchain technology. In the space of a few years, we have moved from the development of cryptomarkets and circulation of cryptocurrencies through decentralised finance (known as DeFi), to the need for organisations or networks of people to organise, pool and deploy resources in blockchain-based ecosystems in a transparent and democratic manner. Cue the creation of the decentralised autonomous organisation, otherwise known as a DAO.

 

DAOs are becoming increasingly prevalent as the web3 ecosystem develops. For many reasons, a DAO is an ideal structure for operating and organising economic and social activity on blockchain and in web3, generally.

 

One current issue for DAOs is that they are not recognised as legal entities across the world, including in Australia, except for:

  • the State of Wyoming in the United States;
  • Vermont in the United States (to an extent); and
  • the Republic of Marshall Islands.

 

This lack of legal recognition is problematic because it makes it difficult for DAOs to interact with the traditional business world (including being unable to enter into traditional forms of contracts). It also creates regulatory uncertainty and, therefore, risk for members. This article breaks down what a DAO is compared to a traditional corporate organisation and explores the current Australian legal landscape.

At the date of this article, DAOs are recognised in the State of Wyoming in the United States of America (and Vermont to an extent) and the Republic of Marshall Islands.

What is a DAO?

A DAO is a member-owned and member-operated organisation run on a blockchain through the use of smart contracts. Smart contracts allow people to control or direct the organisation’s assets either directly or indirectly.

 

Unlike traditional corporate structures, a DAO does not have a centralised leadership or management. Rather, it is governed by democratic and participatory processes or algorithms. These algorithms place the control of the DAO and its assets in the hands of its members. Accordingly, members agree to the use of smart contracts to administer, govern (and effectively, automate) the DAO: the rule of code.

 

As such, the decision-making within a DAO is a democratic and transparent process. The rules of the DAO and its actions (including transactions) are accessible and verifiable by all on a blockchain. Likewise, smart contracts execute its rules of governance and functions. A DAO, therefore, overcomes some of the trust issues inherent in dealing with strangers online. It further facilitates collaboration and coordination among such people around the world.

 

Through smart contracts and blockchain technology, DAOs can leverage other operational efficiencies, including:

  • new and innovative mechanisms for capital formation and deployment of capital towards a purpose (voted on by the members);
  • use of low-cost, automated, digital voting schemes; and
  • implementation of internal controls for asset protection.

Additionally, you can arrange membership of a DAO through the issue of tokens in various ways, such as through a:

  • purchase; or
  • allocation based on some criteria as a reward for contribution.

Depending on the type of token you issue, members receive specific rights. Such rights can be about:

  • decision-making processes;
  • capital (in the form of profits or losses); or
  • resources (to access, manage or transfer resources controlled by the DAO).

Comparison: DAO v Traditional Organisation

Compared to a traditional organisation, a DAO provides several distinct advantages for an organisation intending to operate in a burgeoning web3 ecosystem. For example, it is common to use DAOs for venture capital financing due to their ability to pool and deploy capital rapidly. For many, this speed is more desirable when compared to traditional avenues of raising capital.

 

The table below compares key differences between a DAO structure and a traditional organisation.

DAO

Traditional Corporate Organisation

Flat and democratised structure

Hierarchical structure

Decision-making is tokenised, and generally is decentralised and more reliant on group consensus

Decisions are made by an individual or a group with centralised power / managerial authority (generally, the board or management)

Member voting is ongoing, digital and automated without intermediary

Member voting is at certain times of the year, and subject to prescribed manual processes

All economic and social activity is transparent, accessible and verifiable by members (and the public) on a blockchain

Access to decision-making is limited, including for members; public access is further limited

Functions and services are automated

Functions and services are handled by humans

Relies on smart contracts, including with respect to holding and controlling assets

Relies on written agreements and statutory laws, including with respect to holding and controlling assets

Implementation of internal controls through smart contracts for security and compliance

Internal controls conducted by internal divisions of an organisation or third parties

Members can expeditiously exit the DAO by ‘rage quitting’ (by smart contract)

Shareholders or directors must follow prescribed processes, which may involve multi-step processes and notice periods

Australian Legal Landscape

Australian law does not currently recognise DAOs as legal entities. Therefore, members do not benefit from participating in an organisation that has corporate personhood. The lack of legal recognition potentially exposes members of DAOs to personal liability as well as the organisation’s liabilities.

 

On 20 October 2021, the Senate tabled its final report Select Committee on Australia as a Technology and Financial Centre: final report. The Report gave recommendations for the Australian Government to formally recognise DAOs as a legitimate corporate structure. Indeed, our Government accepted DAOs in principle in 2021.

 

Since then, the DAO Regulation Roundtable has progressed the notion of an Australian DAO regulation (Regulation) and indicated that the Regulation may be a ‘light touch’ legal framework. Accordingly, it would exclude algorithmic DAOs (such as BitCoin) and apply to participatory DAOs. The Regulation will have a transitional phase and retrospective effect, which is essential to note for existing DAOs.

 

If you are looking to set up a DAO in Australia, it will be important to keep up to date with the progress of the proposed Regulation. Further, you should seek guidance on how to structure or restructure the DAO in preparation for the Regulation.

Key Takeaways

A DAO is a member-owned and operated organisation run on a blockchain through smart contracts. They are becoming increasingly prevalent and ideal for operating and organising economic and social activity on blockchain and in web3. A DAO provides several distinct advantages for an organisation intending to operate in a burgeoning web3 ecosystem compared to a traditional organisation. For example, it is common to use DAOs for venture capital financing due to their ability to pool and deploy capital rapidly.

 

If you need help understanding the functionality of cryptocurrencies or Bitcoin, our experienced fintech lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1800 532 904 or visit our membership page.



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