DAO company structure on the agenda
Updated: Oct 25, 2021
Decentralised Autonomous Organisations (DAOs) are a relatively new way for people to organise and co-ordinate towards common goals, relying heavily on blockchain powered smart contracts and usually lacking a central owner/controller.
DAOs exist on a blockchain and decisions of members are made and recorded automatically using self-executing smart contracts. Entrusting the operation of a company to code and software may seem like walking down a path towards a Skynet for business, but in reality DAOs are an experimental and nascent space, albeit one that boasts many advantages as a modern means of business.
The Select Committee on Australia as a Technology and Financial Centre, chaired by Senator Andrew Bragg, recently released their final report (Bragg Report) which included at Recommendation 4:-
The committee recommends that the Australian Government establish a new Decentralised Autonomous Organisation structure
The full report, which is available here, is filled with progressive and exciting developments for FinTech and digital assets. The report notes that a DAO structure is needed so that emerging types of blockchain-based organisations can operate in Australia with clarity and guidance.
DAOs have no leaders, board members or operations beyond what is mutually agreed upon by members in the smart contracts which govern the operation of a DAO. These software enforce rules can cover any aspect of operations, but usually relate to a treasury of digital assets held by the DAO and deployed in grants. No one person can control, profit or endanger the organisation as the model seeks to create a genuine distribution of power among members.
With lessons learned from the COVID-19 Pandemic, businesses were forced to adapt, realising the potential for at home work, and greater digital based collaboration. Global manufacturing, loans and peer-to-peer goods and services all stand to find improvements to their business models using a DAO elements.
While appealing in theory, the law has no formal recognition of DAOs at present. The Coalition of Automated Legal Applications (COALA) has published a DAO Model Law that aims to assist governments in crafting localised DAO laws to recognise a separate legal personality of DAOs. The Bragg Report refers to the COALA model as a useful starting point for developing a legal structure in Australia and encourages the Australian Government to examine this approach.
One of the issues of DAOs which the report addresses is that they are not recognised by law. This means they have no legal personality and cannot enter into contracts, sue, be sued in their own name.
COALAs' model notes blockchain already meets most of the regulatory requirements an organisation is required to comply with under many company laws. With tweaks, COALA believes all major principles and regulatory requirements of corporate governance can be met on a decentralised network and allow DAOs to exist as a new company model.
An industry wide shake-up of the limited liability company which has been used for hundreds of years is likely to encounter criticism. Without legal protection however, those operating within a DAO may be considered to be in a general partnership or some form of unincorporated association.
This means that where one member to the DAO commits a wrong, the other members, while perhaps being entirely innocent, could be liable at law. Pinpointing which individual is responsible for a wrongdoing could be a potential issue particularly given the lack of legal regulation and the way in which blockchain systems operate.
One thing is clear, if the Bragg Report's recommendations are adopted, Australia would not just catch-up to other jurisdictions regulating digital assets, it would move to the very forefront.