DAO-Specific Legislation Isn't Needed Yet, English Legal Body Says

The Law Commission of England and Wales, which reviews and recommends changes to laws to the U.K. government, said it wasn't recommending setting up a new legal framework for decentralized autonomous organizations (DAOs) because they could fall under existing regulations that require companies to have authorization to operate in the U.K.

DAO's could fall under the Financial Services and Markets Act 2000 if they undertake "specified activities" in relation to "specified investments," the independent statutory body wrote in a paper published on Thursday. When governance tokens look like shares, grant voting rights and are issued in exchange for investment into a DAO, then they are regarded as specified investments.

Advertising the tokens may fall under promotion rules that prevent unauthorized companies from reaching out to U.K. customers.

The legal status of DAOs has recently come under scrutiny and courts in the U.S. are already figuring out how to treat them. According to the commission, differences between DAOs mean they may each be subject to different laws, and a unified legislative approach may not be appropriate.

"We do not, at least at this relatively early stage in the development of DAOs, recommend the development of a bespoke legal framework for DAOs in England and Wales," it wrote. "This is largely because 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."

The public law that applies to a DAO will depend on the type of DAO it is, the report said. Some could be characterized as unincorporated associations, with participants interacting according to the rules set. The people would be liable only for their own actions.

In some cases, a DAO may need to pay corporation tax. An international tax framework for DAOs should be considered, the commission said.

From a litigation perspective, a "pure" and completely decentralized DAO could still fall prey to a civil action from a third party, an enforcement action by a regulator or prosecution under criminal law, the report summary said. "A smart contract can constitute a legal contract," the report summary added.

The commission has previously helped draft legislation to digitize documents that paved the way for distributed ledger technology to be used for trade. Earlier this year it sought views on draft legislation that would label crypto as property.

The report also set out that it would be helpful for a body like the Jurisdiction Taskforce, which brings together members of the judiciary, the Law Commission, regulators and other legal professionals, to carry out a fuller analysis of when fiduciary duties might be applied to software developers.

Read more: The Liability of DAOs and Their Founders Has Been Put to the Test in Court