Many say 2023 will be the year of the DAO. This is due to the explosive growth of DAOs (Decentralized Autonomous Organizations) and major advances in software that make it even easier for anyone to start a DAO. It seems likely that 2023 will be the year of the DAO, but will it also be the year the DAO follows the law?
“Breaking the law” may be extreme, but if you are not registered as a legitimate organization, you are not recognized by the government.
Some people may start a new business without much concern, but much of today’s economy is based on organizations obtaining legal positions.
For traditional businesses and organizations, regardless of size or whether they are for-profit or not-for-profit, the first step is to obtain legal authorization, usually in the form of a corporation, foundation, limited liability company, etc. take.
However, the problem is that when multiple people work on a common business without establishing a corporation, regardless of whether it is called a DAO, a company, or a community, the law uniformly treats it as a general partnership. It is to be treated as an unlimited liability union (equivalent to a general partnership company in Japan).
Problems with general partnerships
General partnerships have three major problems.
First, in a general partnership each party is responsible for the actions of the organization and those of the other party. This means that if something goes wrong with the DAO, such as fraud, hacking, or an accident, other members of the organization or outsiders will pursue you as an individual member and try to take away your assets, home, possessions, etc. can do.
Second, the general partnership is not treated as a person from the point of view of the law. In other words, it does not have legal personality. As such, they cannot open bank accounts, buy or own property, sue or be sued, or employ employees.
Of course, not all DAOs want to open a bank account (because they can easily manage their finances on-chain), but most DAOs at least have intellectual property rights and trademark rights to their logos. would like to own
Third, if the general partnership makes a profit, the individual participants are responsible for taxes on that profit. If you own 10% of the general partnership, you will pay taxes on 10% of your profits. Most people don’t realize this.
Unincorporated DAOs, which make up the majority of DAOs, have all three of these problems, whether they know it or not.
Such DAOs do not require members to pay taxes on the DAO’s profits. It is only a matter of time before the tax authorities come and find out that the DAO members are not paying their due taxes.
And as more and more lawsuits are filed against the unincorporated DAO and its members, they will find that they have not followed the laws they should have followed to avoid personal liability.
How can the DAO obey the law?
In early 2021, there were no good options available for DAOs to incorporate. Countries and states offered options that the DAO would have to compromise on too much. For example, they created a list of members’ real names and addresses, elected a board of directors and a board of directors with power over the organization, and were required to record decisions made at meetings in writing.
But in 2022, things changed. DAOs now have options with regard to authorities and legal systems, and some jurisdictions recognize DAOs as the latest evolutionary form of organization.
The states of Wyoming, Tennessee, and the Republic of the Marshall Islands in the United States offer a DAO LLC (Limited Liability Company), a very flexible and powerful option for DAOs that has all the benefits of a traditional LLC. there is
In addition, the Unincorporated Nonprofit Association (UNA) and the Limited Cooperative Associations (LCA) in Colorado are also utilized. Some DAOs have chosen to establish foundations in Switzerland, the Cayman Islands and the British Virgin Islands.
Since early 2022, hundreds of DAOs have incorporated in the aforementioned jurisdictions, gaining access to banking services, protecting members from personal liability and, in many cases, enabling DAOs to pay taxes. there is For non-profit organizations, incorporation usually avoids paying income tax.
Does obeying the law sacrifice decentralization?
A concern often raised by DAO members when considering incorporation is that it would make the DAO less decentralized, contrary to Web3’s core values. There are concerns that incorporation creates a single point of failure that is less censor-resistant than unincorporated DAOs.
But consider that the purpose of incorporation is to create a target of accountability for those who wish to sue the DAO. Even if the corporation is sued, loses its assets, and is forced into bankruptcy, DAO members lose the ability to identify their own tokens, smart contracts for governance, and even opportunities to start over and restart their businesses. does not become
Incorporation does not create targets that did not exist before. It simply diverts the target away from the DAO members.
Another benefit of incorporation is that the legal entity’s governance documents (such as the constitutional documents and operating agreements) can be used to mandate that the organization is decentralized in its governance and operations. In the case of unincorporated DAOs, a small group of individuals or a powerful third party has too much power in their hands to effectively centralize the organization and have no countermeasures.
If the cryptocurrency community learns a lesson from recent events, no matter how regulated or trustworthy it may appear, centralized organizations can become privatized and human greed. can be hidden.
Let’s hope the alarm bells that 2022 rings, such as Celsius Network and FTX, signal the need for decentralization of assets and decision-making, leading to a resurgence of DAOs.
As investment in DAO tools accelerates, DAOs will become leaner and more efficient, and participation will become as easy as checking messages on Telegram.
One way to reach this next level is to intersect with existing legal systems as needed to allow DAOs to mature and integrate into the global economy. For that reason, there is no need to give up decentralization, and by doing so, 2023 will be the year of DAO.
Mr. Adam Miller: Co-founder and CEO of MIDAO, which supports the incorporation of DAO.
｜Translation and editing: Akiko Yamaguchi, Takayuki Masuda
｜Original: 2023: The Year DAOs Follow the Law?