What Australia can learn from Wyoming's DAO Law
Updated: Nov 1, 2021
In April this year, Wyoming made headlines when its legislature approved a first-of-its-kind bill that determined individuals and organisations in the blockchain industry can create a legally recognised Decentralized Autonomous Organisation (DAO) in Wyoming. If countries are spurred to play catch-up and enact their own DAO related laws, like the recent Bragg Report recommends for Australia, the new type of organisation may no longer need to be viewed as a risky experiment but a possible corporate option.
DAOs are a new type of organisation that, instead of being governed by a central owner or group, operates on a distributed basis with no central authority or decisionmaker. How? They use a transparent set of software protocols which allow a distributed group of individuals or entities to make decisions collectively on behalf of the DAO (DAO members) - using smart contracts executed on a blockchain. (You can find a further explanation on how DAOs function here.)
This modern means of business is a new company structure that the Select Committee on Australia as a Technology and Financial Centre, chaired by Senator Andrew Bragg has recommended the Australian Government establish in an effort to help the digital asset industry move forward in Australia. In the Select Committee's recent report Recommendation 4 included:
The committee recommends that the Australian Government establish a new Decentralised Autonomous Organisation structure
Since the DAO model first emerged, the series of benefits that an organisation without a centralised controller could provide has been recognised. But the features of a DAO also means that they operate without a specific legal framework and, as a result, are not given any legal personality at law. Without these protections the legal ownership of assets controlled by a DAO has unclear, and a DAO can look a lot like a general partnership or unincorporated association, exposing its stakeholders to personal liability for any debts or legal actions against a member of the DAO. These are the core issues which need to be resolved by a DAO law so that emerging types of blockchain-based organisations can operate effectively in Australia.
Much like the DAO model law proposed by the Coalition Of Automated Legal Applications (COALA), Wyoming's DAO law attempts to resolve these issues. At a high-level, the Wyoming law prohibits lawsuits against DAOs as general partnerships and enforces the rights of DAOs as legal persons in state court to protect individual DAO members. As a result, the law extends traditional legal protections to DAO members in aims to minimise the risk of DAO members being held personally liable by a DAO.
That's not to say the new law has been free of criticisms. Since Wyoming’s recognition of DAOs, there have been some strong opinions shared on the law, including questions about the additional and allegedly unnecessary burdens it creates for DAOs, an "unsound definition of smart contracts" as a form of a constituent company document, and the law's lack of significant guidance for the ways in which a DAO company in Wyoming practically differs from a traditional company in Wyoming. The discourse is all useful if Australia wishes to follow Wyoming in formulating a DAO structure.
Comments from US lawyers note the approach of Wyoming's DAO legislation is to give maximum effect to the freedom of contract principle, including by waiving the fiduciary duties of DAO members by default. Under the new law, while members of traditional Wyoming companies still owe fiduciary duties of loyalty and care to the company and other members, DAO members participating in a DAO company are only subject to an implied contractual covenant of good faith and fair dealing.
Like the COALA model, the Wyoming Law will benefit from improvements as it is deployed and used. As is always the case, the law lags behind technology, but if DAO members are to enjoy limited liability protection this usual gap may need to converge.