The UK Law Commission has released an exploratory paper addressing the possible legal characterization of decentralized autonomous organizations (DAOs) in the country.
DAOs are blockchain-based communities created for a common purpose, such as investing in startups or purchasing a historical document such as the Constitution. Market observers see these organizations as the future of corporate governance.
Key recommendations
In the July 11 article, the Commission highlighted how current laws could apply to DAOs and proposed several recommendations that would support their innovation in Britain.
The Commission found that there is no immediate need for a DAO-specific legal entity in England and Wales. This position stems from the lack of clear parameters defining the structure and activities of DAOs.
The central thesis of the article lies in the argument that,
“There is no consensus on what a DAO is, how it should be structured, or what a DAO-specific entity could or should look like.”
Commercial and Common Law Commissioner Professor Sarah Green pointed out that DAOs pose a challenge in defining and aligning existing legal forms because there is “disagreement even over what can properly be called a DAO.”
Furthermore, the document highlighted the potential difficulties in adapting existing laws to new technologies. It warned that such efforts could hinder rather than support innovation.
“There is also a risk that in attempts to accommodate a particular technological development, ad hoc and technology-specific legislation will hinder the very dynamics it seeks to facilitate.”
However, the Commission has recommended a review of the Companies Act 2006 to identify any necessary reforms. This review aims to facilitate the increased use of DAO technology at the appropriate levels of government. Likewise, laws applicable to other business organizations, such as limited liability companies, need to be reviewed for the same purpose.
The Law Commission also suggested further studies to assess the usefulness of not-for-profit limited liability companies, such as DAOs, for organizations in England and Wales. Notably, a similar law in Wyoming recognizes blockchain-based DAOs as legal entities.
The document notes that the use of corporate governance code is already possible within UK law, but specific reforms may be needed.
“The law of England and Wales already offers a range of structuring options, which could provide scope for greater use of code for governance and other activities (possibly with some targeted law reform).”
In addition, the newspaper urged the government to revise anti-money laundering rules. This would determine whether distributed ledger technology could achieve the same policy objectives.
While it concluded that a DAO-specific entity within UK law is not recommended, it did state that it would be a valuable future project to ensure that existing legal corporate structures accommodate new technologies (such as DAOs) that achieve the same functional objectives as the current formal requirements.
Consolidating the nature of what makes a DAO a DAO would likely address many of the concerns raised by the Commission.
