- L Misthos and M Bacina
Utah passes latest DAO law
Updated: Mar 10
The Utah State Legislature has passed HB 357, the "Utah Decentralized Autonomous Organizations" Act (Utah DAO Act) aimed at fostering an environment for DAOs to operate within its jurisdiction and providing legal personality for DAOs.
Starting in January 2024, Utah will classify DAOs that register in the state as 'Utah LLDs' under the Utah DAO Act. This legislation was developed through collaboration between the Digital Innovation Task Force and the Utah Blockchain Legislature, and after undergoing rigorous discussions in both the Senate and House committees, it was officially passed on March 1, 2023.
The framework underpinning the Utah DAO Act was derived from the COALA model law, which requires DAOs to comply with a set number of rules to be granted legal personality. The Utah DAO Act, on the other hand, defines ownership of DAOs and protects DAO-compliance anonymity through bylaws and anonymity redactions.
Additionally, the Utah DAO Act aims to:
Incorporate a technology gatekeeping function to assure the DAO is a DAO and not another type of entity.
Introduce quality assurance requirements for DAO protocols.
Introduce nuanced tax treatment consistent with DAO functionalities.
Establish no implicit fiduciary duties owed by DAO participants unless those duties are explicitly stated to apply.
The Utah DAO Act passed both the House and Senate committees with narrow approval, and concerns raised by opposing members. Unaccountable anonymity, inconsistent state and federal tax legislation and a lack of ramp-up time for the Utah Division of Corporation to prepare for implementation were flagged as serious concerns.
Another issue that DAOs, such as protocol DAOs, likely face is the risk of violating the Corporate Transparency Act, which mandates that certain entities must disclose information about their beneficial ownership to the Financial Crimes Enforcement Network (FinCEN).
The use of smart contract codes as the primary foundation of DAOs, coupled with the absence of traditional corporate beneficial owners, creates a roadblock for DAOs wanting to incorporate in Utah. As a result, the Utah DAO Act has been criticized for being at best a stop-gap solution, with suggestions that a different structure would better serve the needs of DAOs.
The Task Force has announced, however, that it will work with the Utah Department of Commerce to engage with industry to ensure that the law is working. Weaknesses in the legislation will be explored and rectification attempted before DAOs are allowed to incorporate in 2024.
Utah joins the US States of Wyoming, Tennessee and Vermont in giving some form of legal recognition to DAOs. Late last year, the Marshall Islands also enacted a DAO Act in an effort to attract DAOs to incorporate in the jurisdiction.
Australia at present has no legislation proposed or drafted to recognise DAOs.