A. Introduction to DAOs

A Decentralised Autonomous Organisation (DAO) is an organisational structure that operates without a centralised authority. It is managed through decentralised computer programs, known as smart contracts, which enforce rules coded on a blockchain. Unlike traditional Organisations, the relationships among DAO members are determined by these smart contracts rather than by legal agreements or government regulations.

When a DAO is established, governance tokens are often created. These tokens grant holders membership in the DAO and voting rights on organisational decisions, with voting power typically increasing with the number of tokens owned. This setup enables a democratic decision-making process where all members can participate and vote on proposals. Initially, the tokens are allocated to contributors, such as the team, users, and early supporters, but they can later be traded on cryptocurrency exchanges.

DAOs face major legal challenges because there aren’t clear rules or recognition for how they operate in every jurisdiction. This creates uncertainty for members and stakeholders. For example, the Ooki DAO case showed how courts might apply traditional business laws to DAOs, which don’t fit their decentralised structure. This can lead to decisions that ignore the core idea of decentralisation. Similarly, the bZx protocol ran into legal issues that raised concerns about members being personally liable under partnership laws, putting them at risk. The lawsuits against Uniswap highlight the ongoing clash between innovative blockchain governance and outdated legal systems. Additionally, the Mantra DAO case exemplifies these challenges, where disputes over management and asset control led to court orders for financial disclosures, further complicating the governance landscape of DAOs. These incidents collectively underscore the urgent need for clearer regulatory frameworks that can accommodate the characteristics of decentralised organisations.

B. Characteristics of DAOs

• Decentralisation: In DAOs, no single person or group has control. Decisions are made collectively by members, similar to a cooperative where every member has a say.
• Autonomy: DAOs function through smart contracts that automate processes and enforce rules without the need for human intervention. Although, in most cases, a DAO is not entirely automated. Typically, one smart contract may handle functions like joining, funding, or withdrawing from the DAO, while another governs its decision-making process. Additionally, certain tasks are carried out by individuals or entities in the real world on behalf of the DAO.
• Blockchain-Based: Transactions and votes are recorded on a blockchain, ensuring transparency and security.

C. Historical Context

The concept of DAOs gained significant attention in 2016 with the launch of the DAO, a venture capital fund on the Ethereum blockchain. It was designed to let investors pool their funds to support projects in the cryptocurrency space. The DAO was a massive success, raising about $150 million from over 11,000 investors in Ether, making it one of the largest crowdfunding efforts in the crypto world at the time.

However, things took a turn when hackers exploited flaws in The DAO’s smart contract code, stealing about $50-70 million worth of Ether. This event highlighted the vulnerabilities of smart contracts and the importance of extensive security in blockchain projects. The hack led to intense debate within the Ethereum community about how to handle the situation. Ethereum’s founder, Vitalik Buterin, proposed a solution called a hard fork, which essentially rewound the blockchain to a point before the hack, allowing affected investors to recover their funds.

The hard fork created two separate blockchains: Ethereum (ETH), which implemented the changes to reverse the hack, and Ethereum Classic (ETC), which kept the original chain intact, including the hack, to honor the principle of blockchain immutability. This split showcased both the potential and the challenges of decentralised governance and smart contracts.

D. Legal Recognition of DAOs

While many DAOs operate without formal legal recognition, some jurisdictions have enacted regulations to provide a legal framework for these entities. Legal recognition can offer protection and clarity for DAO members and operations.

Key Jurisdictions with DAO Regulations

Wyoming, USA: Wyoming was the first U.S. state to recognise DAOs as a new type of Limited Liability Company (LLC) in 2021, granting them legal personhood. To support DAOs, Wyoming has implemented two major legal frameworks: the Wyoming Decentralised Autonomous Organisation Supplement (DAO Supplement) and the Wyoming Decentralised Unincorporated Nonprofit Association Act (DUNA Act).

The DAO Supplement, enacted through Senate Bill 38 on April 21, 2021, and effective from July 1, 2021, allows DAOs to be organised as LLCs under Wyoming law. It includes several key provisions to ensure clear governance and operation. DAOs must explicitly declare their status in their articles of Organisation, and their names must include “DAO,” “LAO” (Limited Autonomous Organisation), or “DAO LLC” to indicate their nature. Members of DAO LLCs are granted liability protection, shielding them from personal responsibility for the Organisation’s debts and obligations, preventing them from being treated as general partnerships.

Each DAO must include a publicly available identifier for any smart contract used in its operations, and such smart contracts must be capable of modification or upgrade. Members of a DAO are subject only to an implied covenant of good faith and fair dealing, rather than the fiduciary duties typically owed in traditional LLCs, unless otherwise specified in the operating agreement. Additionally, any changes to the DAO’s name, corrections to erroneous statements in its articles, or updates to its smart contracts must be reflected in amended articles of Organisation.

On the other hand, the Wyoming Decentralised Unincorporated Nonprofit Association Act (DUNA Act) came into effect on July 1, 2024, to provide a legal framework for non-profit DAOs. It enables the formation of decentralised unincorporated nonprofit associations that operate using blockchain technology. Key provisions of the DUNA Act include the recognition of DUNAs as separate legal entities distinct from their members, allowing them to enter contracts, hold property, and engage in legal actions. DUNAs are also allowed operational flexibility, enabling them to engage in for-profit activities provided that profits are used for the Organisation’s stated purposes, thus ensuring sustainability without compromising their mission. Like DAOs, DUNAs can define their management structure in their governing documents and use distributed ledger technology for governance and decision-making. Additionally, the act permits reasonable compensation for services within the association’s ecosystem, allowing DUNAs to hire staff or contractors while retaining their non-profit status.

Tennessee, USA: On April 20, 2022, Tennessee Governor Bill Lee approved a law (Tenn. Code Ann. § 48-250-101 et seq.) that provides a legal framework for DAOs to register as Limited Liability Companies (LLCs). This law gives DAOs an official legal structure, offering them the same protections as traditional LLCs. It shields DAO members from personal liability, which could otherwise arise without formal recognition.

The law defines a DAO as a “decentralised Organisation,” intentionally avoiding the term “autonomous,” as used in states like Wyoming. This distinction recognises that while DAOs rely on blockchain technology, they may still require some level of human oversight.

To form a DAO, at least one member must sign and file the articles of Organisation with the Secretary of State. The person filing does not need to be a member of the Organisation. The Organisation must maintain a registered agent in the state. It can operate for any lawful purpose, whether for profit or not. The governing documents must clearly state that the Organisation is decentralised, and the DAO’s name must include terms like “DO,” “DAO,” “DO LLC,” or “DAO LLC” to reflect its status.

The management structure of a DAO can be either member-managed or smart contract-managed, providing flexibility for governance. If the structure is not specified, it defaults to member-managed. This allows Organisations to operate either through traditional member decisions or automated systems using smart contracts. For DAOs managed by smart contracts, the law requires the contract to be amendable and include a publicly available identifier.

The legislation also establishes rules for voting and governance. For any vote to be valid, at least 50% of members must participate, setting a clear quorum requirement. These provisions create a balanced framework that accommodates both traditional and technology-driven operational models for DAOs.

Utah, USA: Utah has recently established a legal framework for DAOs through the enactment of HB 357, known as the Utah Decentralised Autonomous Organisations Act (Utah DAO Act).

The Utah DAO Act introduces the concept of Limited Liability Decentralised Organisations (LLDs). This allows DAOs registered in Utah to function as legal entities, similar to traditional LLCs. It lets DAOs enter into contracts and offers legal protection to their members. LLD is defined as an Organisation that operates based on rules written in smart contracts on a permissionless blockchain, with at least one human organiser required to file the necessary documents with the state.

A unique feature of the Utah DAO Act is how it handles ownership and privacy. The law outlines how ownership is structured within DAOs, but it also allows members to keep their identities private by removing them from the bylaws. This means that while the law recognises who owns or runs a DAO, it also protects the identities of members who want to stay anonymous. This helps address privacy and security concerns that often come with blockchain technology.

The governance of LLDs is primarily dictated by the Utah DAO Act itself and the specific bylaws created by each Organisation. If both are silent on certain issues, the traditional Utah Revised Uniform Limited Liability Company Act will apply.

Members of an LLD are only responsible for the amount they’ve contributed to the Organisation on the blockchain. This means they won’t be personally liable for the LLD’s debts or obligations beyond their investment. However, if members vote against following a court order, they could be held responsible based on their level of involvement in the Organisation’s decision-making.

The Utah DAO Act allows members to have someone act as a proxy, meaning someone can vote on their behalf. This makes it easier for members who might not have time or can’t be directly involved to still participate in the decision-making process.

To make sure DAOs run properly, the act also requires them to show that their software code has been checked for quality. They must also have an interface where users can monitor transactions linked to their smart contracts.

Switzerland: While Swiss law does not specifically address DAOs, the Swiss Code of Obligations and the Swiss Civil Code provide a basis for establishing DAOs, even though they were not originally designed for this purpose.

Establishing a DAO involves selecting an appropriate legal structure, and Switzerland offers several viable options due to its blockchain-friendly policies. One popular approach is to form a Swiss Foundation. A foundation has its own legal personality, offering limited liability to its members, and its charter can be customised to align governance rules with the DAO’s operational model. However, the drawbacks include high costs, with an initial capital requirement of approximately CHF 50,000 (around $52,000), and a bureaucratic setup process that involves extensive paperwork and regulatory compliance.

An alternative is the Swiss Association, which is simpler and more cost-effective than a foundation. Associations can be established without registering in the commercial registry, making the process relatively straightforward. Members benefit from limited liability, as they are generally only responsible for the association’s debts up to their contributions. However, associations may not offer the same level of asset protection as foundations, which could be a limitation depending on the DAO’s objectives.

Switzerland’s regulatory stance on DAOs is proactive but measured. The Swiss Financial Markets Authority (FINMA) has issued guidelines related to cryptocurrencies and token offerings, which indirectly impact DAOs. Additionally, DAOs providing services to EU citizens must adhere to the Markets in Crypto-Assets Regulation (MiCAR) from the European Union, ensuring compliance with broader international standards.

Liechtenstein: Liechtenstein has offered a favorable legal environment for DAOs. Central to this is the Token and Trusted Technology Service Provider Act (TVTG), commonly known as the Blockchain Act, which provides a comprehensive framework for the operation of blockchain-based entities, including DAOs.

The Blockchain Act allows DAOs to be recognised as legal entities capable of entering into contracts, owning assets, and being held accountable under Liechtenstein law. To mitigate personal liability risks for members, DAOs can create legal wrappers, such as foundations or limited liability companies; that assume legal responsibilities. This structure provides a layer of protection for individual members while ensuring compliance with regulatory requirements.

DAOs in Liechtenstein must comply with specific regulations to operate lawfully and avoid potential violations. A key requirement is ensuring their activities align with financial transactions and securities laws, particularly when the tokens they issue are classified as securities. These tokens are governed by the Liechtenstein Securities Prospectus Act and the Market Abuse Act, which ensure transparency and protect investors from risks such as market manipulation and insider trading.

Depending on their scope of operations and the services they provide, DAOs may require specific licenses. The Liechtenstein Financial Market Authority (FMA) oversees the licensing process, ensuring that DAOs adhere to established regulatory standards. The FMA also supervises financial intermediaries, including DAOs, to maintain the integrity and stability of the financial market. Additionally, DAOs engaged in activities subject to financial regulations may need to register with the FMA, which helps ensure their compliance with legal frameworks and promotes transparency.

For DAOs providing financial services, implementing Anti-Money Laundering and Know Your Customer procedures is mandatory. These measures, outlined in the Liechtenstein Due Diligence Act, are designed to prevent financial crimes such as money laundering and terrorist financing. Compliance with these requirements helps establish trust and contributes to a secure financial ecosystem.

From a taxation perspective, tokens issued by DAOs are classified as assets under Liechtenstein law, making them subject to taxation upon conversion. However, the country offers a favorable tax regime, including the absence of capital gains tax for individuals and competitive corporate tax rates for entities, providing a supportive financial environment for DAO operations.

Cayman Islands: DAOs are not explicitly defined under Cayman Islands law as distinct legal entities. Instead, they are often viewed as arrangements or informal collectives without separate legal personality, which can resemble a partnership in certain contexts. However, to operate effectively within the legal framework, many DAOs choose to establish themselves as formal entities through structures like foundation companies or LLCs.

The primary regulatory framework applicable to DAOs is the Virtual Asset (Service Providers) Act (VASP Act). This legislation mandates that any DAO engaging in activities involving virtual assets must comply with specific registration and licensing requirements set forth by the Cayman Islands Monetary Authority (CIMA). The application process includes submitting detailed information about governance structures, risk management practices, and AML/CFT policies. The VASP Act aims to ensure that virtual asset activities align with international standards established by the Financial Action Task Force (FATF).

If a DAO’s operations involve issuing, holding, or trading virtual assets, it must register with CIMA and potentially obtain a VASP license. This requirement applies particularly to businesses facilitating virtual asset transactions as part of their operations. Conversely, if a DAO does not engage in such activities, it may avoid the complexities associated with VASP compliance. In addition to the VASP Act, DAOs must be aware of existing financial laws applicable to traditional markets, including securities regulations. If a DAO’s activities fall under these laws, such as issuing tokens that could be classified as securities; it must comply with related registration and licensing requirements. This includes adhering to disclosure obligations and ensuring investor protection measures are in place.

One of the most favored structures for DAOs in the Cayman Islands is the Foundation Company. A Cayman foundation is a legal entity that blends features of corporations and trusts.  A foundation, set up under the Foundation Companies Act of 2017, is designed not to make profits for shareholders but to serve specific goals laid out in its founding documents. This vehicle offers several advantages:

• Ownerless Structure: It can operate without members, requiring only one or more supervisors.
• Founderless Status: This aligns well with DAO principles of decentralisation.
• Flexible Governance: The foundation’s governance can be tailored through its articles and bylaws to reflect the DAO’s operational needs.
• Limited Liability: As an incorporated entity, it provides limited liability protection for its stakeholders.
• Tax Neutrality: The absence of income tax or capital gains tax enhances its attractiveness for crypto projects.

A Cayman foundation offers a flexible governance structure that can be customised to accommodate various roles and responsibilities, making it an effective solution for managing DAO operations while ensuring compliance with legal requirements. This structure allows DAOs to integrate their governance mechanisms directly into the foundation’s bylaws, creating a seamless operational framework. They can oversee treasury management for projects, function as operational entities to implement DAO decisions, and support the development of token protocols and community initiatives. Furthermore, they allow for private token sales under specific conditions without falling under VASP regulations.

Cayman foundations must identify and report their ultimate beneficial owners (UBOs), defined as individuals with 25% or more voting power, control over the board, or significant influence. If no other UBOs are identified, the directors and supervisor are considered the UBOs. UBOs must complete identification and KYC screening, including providing a passport, proof of address, and personal details.

A Cayman entity engaging in specific “relevant” activities must meet economic substance (ES) requirements, such as maintaining a local office, hiring staff, and conducting core activities within the Cayman Islands. These rules ensure entities benefiting from favorable tax laws have genuine operations there, not just tax-avoidance setups. Relevant activities include banking, insurance, fund management, financing, leasing, headquarters operations, shipping, holding company roles, intellectual property, and distribution or service center businesses. DAOs using a Cayman foundation should evaluate if their activities trigger ES requirements and decide whether to comply or adjust the structure to avoid unnecessary obligations. Foundations outside the scope of ES laws can operate with minimal presence while enjoying regulatory and tax advantages.

The Cayman Islands has also enacted data protection legislation that requires organisations to handle personal data responsibly. DAOs must ensure that any personal data collected from users complies with these regulations, including obtaining user consent and implementing data security measures.

Marshall Islands: The Marshall Islands has enacted the DAO Act of 2022 which officially recognises DAOs as distinct legal entities, providing them with a structured legal framework for both non-profit and for-profit operations. To register as a DAO LLC in the Marshall Islands, organisations must comply with specific requirements set by the Marshall Islands DAO Authority (MIDAO). These requirements include defining the DAO’s legal name, which must incorporate the term “DAO LLC,” and specifying its operational purpose. Additionally, at least one individual or legal entity must be listed during registration, although this representative does not need to be a DAO member. DAOs must appoint a local registered agent for incorporation, and member identities must be disclosed in registration documents or smart contracts, potentially deterring those concerned about privacy. Additionally, DAOs are obligated to submit annual reports to MIDAO to maintain compliance. The registration process can take between 30 to 60 days, which may delay the organisation’s operational readiness. Moreover, the DAO’s governing smart contract must be publicly accessible to ensure operational transparency and accountability.

Incorporating in the Marshall Islands offers several advantages. DAO members are granted limited liability protection, shielding them from personal responsibility for the organisation’s debts and obligations. The incorporation process is straightforward, thanks to clear and accessible regulations. The DAO Act introduces relaxed KYC requirements, where only significant voting rights holders or beneficiaries are required to disclose personal information. This promotes inclusivity and operational flexibility, allowing DAOs to design governance structures, rights, and agreements that meet their specific needs. There are no restrictions on the types of activities DAOs can engage in, provided they comply with applicable laws. DAOs can also conduct public token sales without needing special permits, own property, and operate within a defined tax framework. Furthermore, the free association between the Marshall Islands and the United States facilitates ease of incorporation for U.S. citizens. The registration and operational costs are affordable compared to other jurisdictions, making it an appealing choice for decentralised organisations.

Panama: Panama provides a legal framework for DAOs through its Private Foundation model, governed by the Panamanian Private Foundation Law (Law 25 of 1995). To establish a DAO in Panama, the entity must include the term “Foundation” in its name. A council or board must be created to oversee the foundation’s operations, and the founders determine the council’s rights and responsibilities. DAOs have the freedom to define their own operational rules and governance structures, which is important for meeting specific organisational needs. Foundations in Panama can hold both domestic and international assets without facing local taxes on these assets, benefiting DAOs with cross-border activities. While Panama has relaxed KYC requirements, beneficiaries must still provide personal information. Although member anonymity is generally maintained, some disclosure is required for compliance.

Incorporating in Panama offers several advantages. Members are protected from personal liability for the foundation’s debts or obligations. Foundation-held assets are safeguarded from government seizure, providing security for digital assets. Panama does not require member or founder identity disclosures, supporting privacy. Additionally, foundations are exempt from income tax on profits made outside Panama and from withholding taxes on distributions to beneficiaries abroad. The incorporation process is fast, typically completed within 24 hours to two weeks, allowing quick operational readiness. DAOs can also conduct public token sales without needing regulatory permits.

On the other hand, establishing a required council or board may conflict with decentralised governance models. Panama’s lack of specific DAO regulations can create uncertainty regarding compliance and liability. Though KYC requirements are lighter, some beneficiary disclosure is mandatory, potentially deterring those valuing full anonymity. DAOs must appoint a local registered agent, adding administrative responsibilities and costs.

Estonia: Although there is no dedicated legal framework for DAOs in Estonia, they can operate under the existing Commercial Code, primarily using structures like Private Limited Companies or non-profit associations. Private Limited Companies are particularly suitable for DAOs aiming to generate profit, as they provide limited liability protection to members and allow for automated governance through smart contracts, aligning well with the needs of DAOs focused on economic activities. On the other hand, non-profit associations are ideal for DAOs with social or mission-driven goals, offering flexibility in governance and asset protection. This makes them a good fit for organisations prioritising community engagement and social impact over profit generation. Estonia’s regulatory framework is managed by the Estonian Financial Supervisory Authority (EFSA), especially for activities involving digital tokens. If DAOs issue tokens classified as securities, they must comply with the Anti-Money Laundering Act, which requires due diligence and Know Your Customer standards. Depending on their activities, DAOs may also need to acquire a Financial Institution license or a Virtual Currency License. The Estonian e-Residency program significantly simplifies the process of setting up and managing DAOs. It allows founders to establish and operate legal entities online without needing to be physically present in Estonia, benefiting international entrepreneurs who want to leverage Estonia’s digital solutions while minimising legal risks associated with decentralised operations. Additionally, Estonia’s corporate tax system is attractive to DAOs, as a 20% tax is only imposed on profits that are distributed, meaning reinvested profits are not taxed. This favorable tax structure encourages DAOs to focus on growing their operations rather than paying out dividends.

Malta: Malta offers a legal framework for DAOs through key regulations: the Malta Digital Innovation Authority Act (MDIA Act), the Virtual Financial Assets Act (VFA Act), and the Innovative Technology Arrangements and Services Act (ITAS Act). These laws establish clear guidelines for DAOs to operate.

The ITAS Act recognises organisations “with or without legal personality,” including DAOs, allowing them to potentially achieve legal status under Maltese law. DAOs can apply for registration as Innovative Technology Arrangements (ITAs), enabling them to have their smart contracts audited and gain recognition from the Malta Digital Innovation Authority (MDIA). DAOs may also operate under traditional legal structures, such as Private Limited Companies (PLCs) or Foundations, with Foundations being particularly suited for mission-driven DAOs due to their limited liability and structured governance model.

DAOs issuing or managing digital tokens must comply with the VFA Act, which requires registration with the Malta Financial Services Authority (MFSA) and adherence to AML and CFT standards. A VFA license is required for token-related activities. Malta offers a competitive corporate tax rate of 35%, with deductions and tax credits for blockchain projects.

Abu Dhabi: The Abu Dhabi Global Market (ADGM) has introduced a framework for DAOs under the Distributed Ledger Technology (DLT) Foundations Regulations 2023. Under this framework, DAOs can register as legal entities, gaining formal recognition to own assets, issue tokens, and carry out financial transactions. To complete registration, DAOs must provide a foundational charter, a compliance declaration, and a list of initial beneficial owners and controllers. They must also maintain a minimum asset value of $25,000 in fiat currency within six months of incorporation.

The regulations provide DAOs with the flexibility to design their own governance systems without requiring traditional bylaws. Members and token holders are shielded from personal liability, offering strong legal protection to participants. Additionally, DAOs must follow strict compliance rules, including adherence to AML and CTF laws. They are also required to submit regular financial reports and meet high standards for cybersecurity and data protection.

ADGM’s tax policies further enhance its attractiveness as a hub for blockchain projects. While the corporate tax rate is set at 9%, qualifying entities can enjoy a 0% tax rate, making it an appealing option for innovative digital ventures and DAOs.

Ras Al Khaimah: The Ras Al Khaimah Digital Assets Oasis (RAK DAO) in the United Arab Emirates introduced the Decentralized Association Regime (DARe) in October 2024. This framework provids a formal legal structure specifically designed for DAOs. The DARe framework grants DAOs legal personality, enabling them to enter into contracts, own both on-chain and off-chain assets, and engage with off-chain entities. Members of DAOs benefit from limited liability protection, safeguarding their personal assets from the organization’s legal and financial obligations. Existing DAOs can register as DAO Associations, which simplifies interactions with regulators and tax authorities. Notably, international founders can register remotely through a registered UAE agent, eliminating the need for physical presence. The framework primarily supports non-profit entities, allowing member compensation while prohibiting capital distribution. Registration requires member consent and a clear definition of the organization’s objectives. Additionally, DAOs have the legal right to issue tokens for fundraising and governance purposes, and they can establish sub-DAOs to manage specialized functions and resources. A two-tier governance system further supports delegation models for decision-making and accommodates multi-level governance frameworks.

The DARe framework is suitable for various DAO models, including grassroots and community projects, collaborative software development ecosystems, and decentralized research and innovation hubs. Two distinct DAO packages are available: the Startup DAO package, designed for DAOs with fewer than 100 members, under $1 million in treasury, and no public token sale, with registration and annual fees of $4,500; and the Alpha DAO package, intended for DAOs with over 100 members, $1 million or more in treasury, and public token sales, with registration and annual fees of $9,500.

Japan: In April 2024, Japan amended the Financial Instruments and Exchange Act (FIEA) to address the legal treatment of tokenised membership interests in limited liability companies, known as “godo kaisha” (GK). This amendment provides a clear framework for DAOs to operate as GKs, granting them legal recognition and regulatory flexibility. Under this framework, DAOs can issue tokenised membership interests to up to 499 individuals without triggering full securities regulations, provided specific conditions are met. These include limiting token transfers to managing members and capping dividends or distributions to the original investment amount. By meeting these requirements, DAOs benefit from reduced disclosure obligations and streamlined compliance, making the GK structure an accessible legal option for blockchain-based organisations.

To further support DAOs, Japan introduced resources like templates for incorporation and operational guidelines through the Japan DAO Association. The government’s “Web3 White Paper 2024” outlines additional measures to strengthen the ecosystem, including improved banking access for blockchain companies, clearer tax and accounting rules, and incentives for Web3 projects.

E. Examples of Successful DAOs

Uniswap DAO: A decentralised cryptocurrency exchange on Ethereum. Members hold UNI tokens, giving them voting rights on governance decisions. Uniswap’s DAO oversees the development and upgrades of the platform. However, Uniswap has faced scrutiny from the SEC for potential violations of securities laws, highlighting the importance of regulatory compliance for DAOs.

Curve DAO: Uses an Automated Market Maker model to offer rewards to long-term token holders who can vote on proposals and participate in governance. It focuses on stablecoin trading with minimal slippage.

MakerDAO: Manages the DAI stablecoin, allowing users to create and manage loans, and operates as a decentralised bank. Responsible for maintaining DAI’s peg to the US dollar, it must comply with financial regulations concerning stablecoins and lending activities.

Aave DAO: A decentralised lending platform where the community votes on platform decisions and upgrades. It allows users to lend and borrow a variety of cryptocurrencies, ensuring compliance with AML/KYC regulations for users interacting with the platform.

Compound DAO: A decentralised lending protocol where the DAO controls the protocol’s treasury and governance decisions. It allows users to earn interest on their crypto assets by lending them out.

F. Managing and Distributing Funds in DAOs

Unlike traditional organisations, where financial power is often concentrated in the hands of a few, DAOs use technology and collaborative systems to give everyone a say. This not only improves security but also makes members feel more involved and responsible.

Key Strategies for Managing DAO Funds are as follows:

Treasury Management: DAOs typically keep their funds in multi-signature wallets, which require approval from several members before transactions can happen. This reduces the risk of fraud or unauthorised access. For instance, if a DAO has $1 million in its treasury, spending even a small portion needs the green light from multiple trusted members. This ensures decisions are made as a group, not by one person.

Smart Contracts: DAOs use smart contracts to automate financial tasks. These are like digital agreements that run automatically when certain conditions are met. For example, a smart contract could release funds only after a specific milestone is reached. This reduces human error, speeds up processes, and keeps the system running smoothly without constant manual intervention.

Proposals and Voting: Members play a key role in deciding how funds are used by submitting proposals. For instance, someone might propose using DAO funds to organise an event or develop new features. These proposals are then voted on by members holding governance tokens, which give them voting rights. The decisions are made collectively, ensuring everyone has a voice in how resources are allocated.

Example: MakerDAO is a great example of how DAOs manage funds effectively. It governs the stablecoin DAI and involves its members in key financial decisions. Members propose changes like adjusting risk parameters or collateral requirements, discuss them, and vote using their governance tokens. The decisions directly impact how the treasury is managed, showing how DAOs can successfully apply democratic principles to financial systems.

G. Money Laundering and Terrorism Financing in DAOs

The very features that make DAOs attractive: decentralisation, anonymity, and lack of centralised control, also create significant challenges for regulatory compliance, particularly with Anti-Money Laundering (AML) and Counter-Terrorism Financing (CTF) measures. Blockchain technology allows users to remain pseudonymous, making it harder to enforce KYC regulations. Criminals can exploit this to obscure the source of funds, while decentralised exchanges enable peer-to-peer transactions with minimal oversight. Without a central authority, DAOs face difficulties implementing accountability and compliance measures. These global issues demand extensive frameworks to prevent illicit activities, and governments are extending these frameworks to decentralised entities like DAOs.

U.S. Regulations

In 2019, the U.S. Financial Crimes Enforcement Network (FinCEN) classified DAOs as potential money transmitters. This classification imposes strict AML/CTF obligations, including implementing Know Your Customer procedures and reporting suspicious transactions. However, the decentralised nature of DAOs complicates compliance, as there is often no central authority to oversee these measures.

EU Regulations

Similarly, the European Union’s 5th Anti-Money Laundering Directive requires DAOs to follow AML/CTF protocols like customer due diligence and transaction monitoring. Entities operating within the EU must establish compliance frameworks to detect and report suspicious activities effectively.

Financial institutions interacting with DAOs must adopt enhanced due diligence and risk-based approaches to address challenges in decentralised finance. The Financial Action Task Force (FATF) has emphasised the importance of tailoring AML/CTF policies to the specific risks posed by DAOs.

H. Taxation of DAOs

DAOs operating on blockchain technology without traditional legal structures, present challenges for taxation. Tax treatment varies across jurisdictions, depending on the DAO’s activities, structure, and the regulatory environment. Below is an overview of how some key jurisdictions approach DAO taxation:

United States

In the U.S., the IRS classifies virtual currencies as property, making DAO transactions taxable events. Participants must report income earned through DAO activities, such as tokens received for services or profits distributed. These tokens are taxed based on their market value when received, and any later sale may incur capital gains tax. Although the IRS has not explicitly defined DAOs as taxable entities, they are often treated as pass-through entities. This requires members to report their share of profits on personal tax returns, even if not distributed.

Australia

The Australian Taxation Office (ATO) treats DAOs similarly to partnerships or companies, depending on their structure. Earnings from DAO activities are subject to income tax, and participants must report cryptocurrency received for goods or services as income. Additionally, the sale of tokens acquired through DAOs may incur capital gains tax on profits.

European Union

Taxation of DAOs in the EU varies by member state but typically aligns with cryptocurrency taxation. Cryptocurrencies are generally treated as assets, and profits from DAO activities are subject to capital gains tax. The lack of uniform regulations across the EU creates compliance challenges, particularly for DAOs operating across borders.

Wyoming, United States

Wyoming’s progressive legal framework makes it a favorable location for DAO registration. DAOs formed as LLCs in Wyoming are treated as pass-through entities, meaning members report earnings on their personal tax returns, avoiding double taxation. However, foreign members may face a 30% withholding tax on U.S.-source income. Wyoming’s lack of state income taxes further enhances its appeal for DAOs.

Cayman Islands

No direct taxes on corporations or individuals make this jurisdiction attractive for DAOs. However, DAOs conducting business outside the Cayman Islands may face local taxation.

The decentralised nature of DAOs presents significant taxation challenges. One major issue is the difficulty in defining taxable entities, as the absence of a central authority makes it unclear whether DAOs should be treated as corporate entities or as a collection of individual participants for tax purposes. Additionally, DAOs often operate across multiple jurisdictions, complicating the determination of taxing rights and potentially leading to double taxation or disputes over compliance responsibilities.

Switzerland

DAOs can be structured as foundations or associations, each with distinct tax implications. Foundations are generally treated as for-profit entities and must pay federal, cantonal, and communal taxes. Achieving non-profit status is difficult unless the foundation serves a public interest. The federal corporate tax rate is about 11.5%, but total tax rates can vary by canton, reaching up to 36%. DAOs must comply with AML and KYC regulations. If a DAO serves EU citizens, it must follow the Markets in Crypto Asset Regulation.

Marshall Islands

Marshall Islands offers a tax-free environment for DAOs, with no corporate income tax or capital gains tax. This makes it an attractive option for decentralized organizations seeking minimal tax obligations. However, DAOs may still face licensing fees or other compliance costs for local operations.

Panama

Panama applies a territorial tax system, meaning only income generated within Panama is taxed. DAOs are exempt from income tax on profits earned outside the country. The standard corporate tax rate is 25% on domestic income, and there is no capital gains tax on shares sold abroad.

Estonia

Estonia taxes corporate profits only when they are distributed. DAOs structured as companies face a 20% corporate income tax on distributed profits, while retained earnings are not taxed, encouraging reinvestment. Large digital companies may be subject to additional taxes under Estonia’s digital services tax framework.

Malta

Malta has a nominal corporate tax rate of 35%. However, foreign shareholders can receive tax refunds, reducing the effective rate to as low as 5% on distributed profits. Malta also offers incentives for technology and blockchain businesses, making it appealing for DAOs.

Abu Dhabi

In Abu Dhabi, a 9% corporate tax applies to profits over AED 375,000 as of 2023. However, there is no personal income tax, and the UAE remains a business-friendly environment with its low-tax regime.

Japan

Japan has a more traditional tax structure. The corporate income tax rate ranges from 23% to 30%, depending on business size and location. A 10% consumption tax applies to goods and services sold within Japan.

I. Data Protection and Privacy in DAOs

DAOs rely on blockchain technology to enable decentralised decision-making and governance. While they promote transparency and community involvement, they also pose challenges in ensuring data protection and privacy. The public nature of blockchain means that all transactions and governance actions are accessible, which can expose participants’ sensitive information and deter full engagement. Striking a balance between transparency and privacy is essential for DAOs to maintain trust and encourage participation.

Data protection laws like the EU’s General Data Protection Regulation (GDPR) impose strict requirements on DAOs operating in or interacting with residents of specific jurisdictions. For instance, GDPR mandates principles like data minimisation, the right to access personal data, and the right to erasure. Similarly, laws such as California’s Consumer privacy Act (CCPA) and Canada’s Personal Information Protection and Electronic Documents Act (PIPEDA) enforce privacy rights for residents of their regions. However, DAOs, with their decentralised and often anonymous nature, face challenges in complying with these regulations, particularly in identifying responsible entities for data management and ensuring members’ privacy rights.

DAOs also contend with risks tied to anonymity and pseudonymity, which can conflict with regulations requiring identifiable personal data. Additionally, vulnerabilities in smart contracts, the backbone of DAOs, can expose sensitive information and disrupt governance processes, emphasising the need for security measures.

To enhance privacy and data protection, DAOs can adopt technologies like zero-knowledge proofs, which verify information without revealing it, and decentralised identity solutions, allowing compliance with KYC requirements while protecting user data. Establishing clear governance policies is equally vital, detailing how personal data is managed, stored, and protected, alongside procedures for addressing breaches.

J. Comparative analysis

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K. Challenges and Complexities in DAOs

DAOs, while they offer innovative solutions for collective participation, also face significant challenges that require close examination. Key issues include discrepancies between stated goals and actual outcomes, the implications of anonymity, transparency concerns, audit complexities, conflicts of interest, fraud penalties, and removal mechanisms:

Stated vs. Realised Interests: DAOs aim to align members’ interests through token-based governance, where members’ financial stakes tie directly to the organisation’s success. However, power often concentrates in the hands of “whale” investors who hold large amounts of tokens, allowing them to dominate decision-making. This creates a gap between the DAO’s democratic ideals and the reality of imbalanced influence, potentially sidelining smaller stakeholders.

Anonymity: Anonymity in DAOs can protect privacy and encourage participation without fear of repercussions. However, it also enables unethical behavior and fraud, as pseudonymous actors can evade accountability. This lack of traceable responsibility poses challenges for maintaining trust and enforcing fair governance.

Transparency: DAOs are celebrated for their transparency, as blockchain records are public and immutable. Yet, this transparency is only as effective as its accessibility and clarity. Complex or opaque decision-making processes and incomplete disclosures can undermine the trust that transparency is meant to build. Participants may struggle to interpret or fully understand the implications of governance actions.

Audit Processes: The decentralised and immutable nature of blockchain enhances the auditability of DAOs by providing a real-time record of transactions. However, traditional auditing faces challenges in this context due to the complexity of smart contracts and decentralised operations. While blockchain reduces certain risks, vulnerabilities in smart contracts can still lead to fraud and financial losses.

Conflicts of Interest: Conflicts of interest are common in DAOs, especially when influential members prioritise personal gains over the collective good. Major stakeholders with substantial voting power can sway decisions to benefit themselves, exacerbated by the absence of formal regulations to curb unethical practices.

Fraud Penalties: DAOs can embed penalties for fraudulent behavior directly into smart contracts, automating actions like freezing assets or revoking voting rights. However, the effectiveness of such penalties depends on clear and enforceable rules. The lack of legal frameworks surrounding DAOs further complicates efforts to address fraud.

Removal Mechanisms: DAOs often include processes for removing members or leaders who act against the organisation’s interests. However, these mechanisms can be slow and prone to manipulation by powerful stakeholders. Low member participation in governance votes and the procedural complexity of removals can hinder timely and effective action against problematic individuals.

L. Conclusion

As DAOs continue to evolve, they challenge traditional organisational structures by offering a unique blend of decentralisation, transparency, and community-driven decision-making. However, this innovation comes with its own set of hurdles, particularly in navigating a complex and often fragmented regulatory landscape.

Jurisdictions like Wyoming, the Cayman Islands, and ADGM have established tailored frameworks for DAOs, while others, such as Japan and Switzerland, have adapted existing laws to accommodate decentralised governance. These approaches reflect regional priorities, whether targeting innovation, attracting investment, or ensuring regulatory compliance. While some regions are leading with progressive legal structures, the future of DAOs depends on more than legal recognition. It requires a collective effort to promote ethical governance, best practices, and a balance between decentralisation and accountability.

Despite differences, many jurisdictions are converging around key elements AML and KYC compliance, token classification, and governance standards. These shared features give DAOs a stronger legal foundation. However, major differences remain in areas such as governance flexibility, liability protections, and tax policies, influencing where DAOs choose to operate and how they navigate cross-border complexities. A significant challenge is that most existing frameworks struggle to fully address DAOs’ unique characteristics, like decentralised control, reliance on smart contracts, and a lack of geographic boundaries. Misapplication of traditional legal principles, as seen in cases like Ooki DAO and bZx, risks undermining the core concept of decentralisation, creating uncertainty for DAO participants.

Recognising these gaps, some jurisdictions have taken steps to adapt. For example, Wyoming’s DAO Supplement and ADGM’s Distributed Ledger Technology Foundations provide innovative models that balance regulatory oversight with the flexibility needed for decentralised organisations. Creating global standards for DAOs can reduce regulatory confusion and operational challenges. A universal classification system based on purpose and governance models, along with core principles like accountability and member protections, would simplify registration and ensure responsible operations worldwide.