Domestic personnel prepare to build a Web3 project: from the legal issues of DAO

The full name of DAO is Distributed Autonomous Organization. As the organizational paradigm of Web3 projects, DAO is more like a blockchain version of “on-chain company”, which embeds management and operating rules into smart contracts and coexists to On the blockchain, making it out of centralized control.

In the current Web3 project, building a complete DAO has become an important part of many projects. When creating a traditional corporate body, we usually need to consider basic issues such as taxation, finance, organizational structure, and compensation system, so what is the difference between building a decentralized DAO in comparison? What are the differences between domestic and foreign supervision of DAOs at present? What legal risks should domestic personnel be aware of when preparing to build a DAO?


             Source: baidu

1. DAO, limited company, partnership, or business trust?

In real life, to create a company subject needs to go to the industry and commerce bureau for registration, and most countries and regions have not yet recognized the legal subject status of DAO. In order to operate a DAO in the long run, some DAO founders will Set up a company entity to facilitate the signing of a series of legal documents, such as BanklessDAO, which has great influence in the encryption community. It was founded in 2019 as an information platform to track the dynamics of the encryption industry. The company began to operate with the structure of the company.

Regarding the legal attributes of DAO itself, at the theoretical level, some scholars believe that in view of the sufficient technical space as a legal person, the gradual establishment of the organizational foundation, the strong institutional demand, and the existing practice, some scholars believe that decentralization should be considered. The legal person qualification of an autonomous organization can be identified as a limited partnership according to its common attributes, characteristics and main elements. It has also been argued that the DAO should be considered a general partnership, and while this theory has not been proven in court and has faced some criticism, it has the potential to make DAO members liable for the responsibilities of other members or the DAO’s responsibilities.

Some scholars also believe that the holder of the business trust certificate has the same role as the token holder, that is, it has the power to elect, control and remove the trustee, and to modify the “trust instrument”, and the trustee has the fiduciary responsibility to the settlor. and fiduciary obligations, similar to the responsibility of company directors to shareholders, so decentralized autonomous organizations can be included in the category of business trusts. Designated as a special purpose trust, it can be created by transferring assets to a group of trustees who, in turn, can act on the voting instructions of the DAO’s token holders. Trustees are overseen by executors and can sue if they misbehave.

At a practical level, only a few regions in the world are currently considering incorporating them into the category of traditional legal entities. For example, in July 2018, Malta introduced the Malta Digital Innovation Authority Act (MDIA) and the Virtual Financial Assets Act (VFA). , the “Innovative Technology Arrangements and Services Act” (ITAS) three regulatory bills, establishing authoritative institutions to supervise related behaviors such as token transactions, focusing on ICO and certain service providers, among which the “Innovative Technology Arrangements and Services Act” “(ITAS) allows distributed autonomous organizations to be certified as “Innovative Technology Service Providers” for registration. After registration, the service provider will be granted a certificate of registration, which includes the categories of services provided and the identification details of the services that the applicant has registered. . The certificate is designed to increase the transparency, certainty and trustworthiness of registered and certified innovative technology arrangements, so that all users of the relevant innovative technology arrangements can access the certificate.

Another example is that in June 2018, the Vermont Legislature promulgated the “Vermont Bill For blockchain”, which refers to companies operating on distributed blockchain networks as “limited liability organizations organized under this title”. Company”, whose purpose is to operate a business that utilizes blockchain technology for a significant part of its business activities, its applicant must “specify whether the decentralized consensus ledger or database used or enabled by BBLLC is fully or partially decentralized, and such Whether the ledger or database is fully or partially public or private, including the extent to which participants have access to information and read and write permissions to the protocol.

In addition, in July 2021, Wyoming’s Decentralized Autonomous Organization (DAO) Act came into effect, recognizing that DAO is a limited liability company. A Wyoming DAO is an entity owned and managed by its collective members, has no central authority, and operates through smart contracts that execute automatically as long as a specific set of criteria are met. The Act complements Wyoming’s existing LLC Act, providing rules for the creation and administration of DAOs. The Special Clause allows the company to be fully governed (in whole or in part) by smart contracts, and also provides definitions and benchmarking requirements for the formation, governance, voting rights, membership rights, operating agreements, membership exit and dissolution of a DAO. This type of legislation makes such DAO projects easier, more cost-effective, and provides legitimacy.

In February 2022, the Pacific Island Republic of the Marshall Islands, which is keen to adopt blockchain technology, formally amended the “Non-Profit Entity Law” to recognize the DAO as a legal entity. The amendment has allowed crypto trading infrastructure platform Shipyard Software to register the island nation’s first DAO, Admiralty LLC.


              Source: baidu

2. Legal risks of DAO organization preparation

An ideal DAO should have the characteristics of transparency, openness, decentralization and full automation. In this regard, most so-called DAOs are not DAOs in the true sense, or DAOs in the 1.0 stage, that is, their decentralization. Automation, transparency and full automation are still at a low level.

From the historical path of the development of things, decentralization is more like a process than a result. As a new organizational paradigm, DAO must be relatively centralized in the early stage before it continues to develop into an ideal DAO, and full automation means the relative maturity of internal governance, which requires smart contracts to realize workload proof and automatic decision-making mechanism. As far as proof of work is concerned, most of the current intellectual labor is difficult to measure the value with a single standard, and it is impossible to fairly evaluate the workload of different intellectual labor results in terms of time and effectiveness. Similarly, in terms of decision-making mechanisms, although some DAOs are currently improving decision-making mechanisms, such as proposing quadratic voting, delegated voting/liquid democracy, holographic consensus, token-based minimum quorum voting decisions, relative majority voting decisions, and weight-based voting Weighted (such as reputation) voting decision-making forms to supplement the single token voting mechanism to prevent member indifference and monopoly of voting rights, but it is still a difficult problem to realize such automatic decision-making and scientific and reasonable decision-making mechanism in practice.

It is precisely due to the imperfection of DAO itself, the ambiguity of legal attributes, and the continuous development of decentralization, that it also has some risks in the face of traditional laws.

When the DAO has no legal status, due to the low degree of decentralization in the early stage, it may be identified as a “partnership” in terms of attributes, thus requiring the participating members of the DAO to bear unlimited joint and several legal liabilities. On this basis, well-known DAO participants, those who are committed to maintaining DAO’s internal projects, organizing leaders, and promoting communication and collaboration may become targeted targets for regulatory enforcement and civil disputes.

In essence, the emergence of DAO promotes the facilitation of global employment and collaboration, and fully encourages organization members to collaborate across regions to maximize their individual strengths. There is no physical office location, board of directors, supervisory committee, etc. Most countries and regions do not have entities in the legal sense, and in the event of investment, financing, fundraising, fraud, etc., the courts will not regard them as legal entities with independent and autonomous legal status, given the current low degree of decentralization. Despite the existence of smart contracts, law enforcement and the judiciary may decide that direct legal responsibility lies with the main participants or developers of the DAO.

In March 2018, the U.S. Securities and Exchange Commission (SEC) issued a “Statement on Suspected Illegal Laws of Digital Asset Online Trading Platforms”. The announcement focused on online trading platforms used to buy cryptocurrencies and tokens offered and sold by ICOs, and DAOs in a broad sense also fall into this category. The SEC will also warn investors that some investment platforms lack investor protection and SEC oversight. DAO tokens may be identified as issuing unregistered securities when several criteria of the “Howey Test” are met. The main reason is that The following three points:

First, DAO, a for-profit entity, financed projects by selling DAO tokens; second, DAO token holders were expected to share the proceeds of these projects as investment reports; third, holders could A digital platform’s secondary market for trading DAO tokens. When the Simple Agreement for Future Tokens (SAFT) is used, investors will use existing funds to trade from the project party to obtain the right to tokens in the future, which will directly touch the United States. A range of compliance obligations under the federal securities laws.


             Source: baidu

3. How domestic entities prepare to establish a DAO organization in compliance

At present, cryptocurrencies are strictly regulated in China, so from the perspective of token governance, there is no real DAO in China.

From the perspective of organizing funds to raise funds, most DAOs currently have financing behaviors in the early stage. In view of the strict supervision of ICO behavior in China, domestic DAOs raising funds through currency issuance are likely to be suspected of illegal issuance of securities, illegal fundraising, and financial fraud. , pyramid schemes and other illegal and criminal activities.

If funds are raised through the sale of NFTs, according to the joint document issued by the three associations in my country in 2022 – “The Initiative on Preventing Financial Risks Related to NFTs”, my country’s supervision of NFTs is actually referring to the relevant regulatory rules of cryptocurrencies, requiring The development of NFT is de-financialized, so this kind of behavior is likely to constitute crimes such as fundraising fraud in the context of penetrating supervision.

In addition, there may also be certain legal risks such as absorbing virtual currency as the operating cost of DAO. In February 2022, the Supreme People’s Court issued the “Decision on Amending the Interpretation of the Supreme People’s Court on Several Issues Concerning the Specific Application of Law in the Trial of Criminal Cases of Illegal Fund Raising”, convicting the crime of illegally absorbing public deposits and fund-raising fraud in the original judicial interpretation The penalty standards have been revised and improved to clarify the application of relevant laws. After the revision, new methods of illegally absorbing funds such as online lending, virtual currency transactions, and financial leasing have been added to provide legal punishment for illegal fund-raising crimes such as P2P, virtual currency transactions, and elderly care. in accordance with. However, not all acts of absorbing virtual currency necessarily constitute the crime of illegally absorbing public existence or the crime of fund-raising fraud.

According to Paragraph 8 of Article 2 of the Interpretation: “Anyone who commits any of the following acts and meets the conditions specified in Paragraph 1 of Article 1 of this Interpretation shall, in accordance with the provisions of Article 176 of the Criminal Law, be illegally absorbed Conviction and punishment for the crime of public deposits: (8) Illegal absorption of funds by means of online lending, investment in shares, virtual currency transactions, etc.;

It is clearly pointed out here that virtual currency transactions meet the provisions of Article 1, paragraph 1 of the Interpretation to be considered non-suction, while Article 1, paragraph 1 of the Interpretation stipulates: “In violation of the provisions of the national financial management laws, the public (including units) and individuals) absorbing funds, if the following four conditions are met at the same time, unless otherwise stipulated by the Criminal Law, it shall be deemed as “illegal absorption of public deposits or disguised absorption of public deposits” as stipulated in Article 176 of the Criminal Law:

(1) Absorbing funds without the legal permission of relevant departments or by borrowing legal business; (2) Publicizing to the public through the Internet, media, promotion conferences, leaflets, mobile phone information, etc.; (3) Promise to use currency within a certain period , in kind, equity, etc. to repay the principal and interest or pay returns; (4) Absorb funds from the public, that is, from unspecified social objects. Therefore, if it is necessary to determine that DAO’s raising of virtual currency is a non-sucking behavior, it must meet four basic conditions of illegality, openness, inducement, and sociality.

Therefore, from the compliance level, the domestic compliance of token-governed DAOs will obviously be subject to the strict supervision policies of domestic cryptocurrencies, but in terms of specific behavior, they have not raised funds through the issuance of tokens or NFTs, and hyped them in the secondary market. , There are still wide possibilities for DAOs to prevent financialization risks.


1. Guo Shaofei. Re-discussion on the legal nature of blockchain decentralized autonomous organizations——Also on the institutional design as a legal person [J]. Journal of Soochow University (Philosophy and Social Sciences Edition), 2021,42(03):75-85 .

2. Paradigm: How to wrap a DAO by law?

3、 Carla L. Reyes, If Rockefeller Were a Coder, The George Washington Law Review, 2019,Vol. 87,pp.384-387.

Posted by:CoinYuppie,Reprinted with attribution to:
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