Aussie Lawyers Propose New Legal Entity for Decentralised Companies (DAOs)

July 17, 2021, 10:00 AM AEST - 4 months ago

Decentralised Autonomous Organisations (DAOs) in Australia are currently construed as partnerships or unincorporated associations. The Digital Law Association (DLA) and international law firm Herbert Smith Freehills want to change that.

DAO Operations. Source: Pngkey

DAOs as Recognised Legal Entities

Despite DAOs gaining traction in Australia, they are not yet formally recognised as they have been elsewhere. Venture capital firms in the US, however, remain eager to access the Australian DeFi market as they recognise its role as an international leader.

They are conscious this is a key innovation centre now for DeFi and want to back Aussie entrepreneurs.

Richard Galvin, CEO, Digital Asset Capital Management

Despite the enthusiasm of investors, the current Australian legal framework is somewhat grey and creates three main challenges:

  • The status of contracts entered into between DAOs and other entities in the real economy is murky.
  • Currently, all members of a DAO risk legal liability and potential losses for decisions made by a single member of the community.
  • Innovation is stifled as members of DAOs remain concerned that even if they try to do the right thing, the Australian Securities and Investments Commission (ASIC) might take action for something in the future.

DLA therefore suggests that Australia creates a new legal entity, say DAO Limited, which would enable it to contract with other entities in the real economy as well as offer limited liability for its members against potential claims. Rather than a board of directors making decisions, it would be an internet community.

DLA has put forward a number of suggestions including:

  • Establishing a new “authorisation class” that could operate within the current Australian Financial Services Licence (AFSL) regime.
  • Conducting a review of the impact of tax laws on DAOs to ensure technological neutrality happens in practice.
  • Require directors and senior executives of digital asset businesses to undertake annual training programs in “organisational cyber resilience”.
  • Updating ASIC’s Regulatory Guide 172 to give guidance on the licensing regime and obligations for DAO-run financial markets such as Uniswap.

DAOs Still In Their Infancy

DAOs are undoubtedly one of the most exciting developments within the blockchain industry. This week alone, leading exchange ShapeShift coverted its corporate structure into a DAO. However, given that it is a nascent space, there are numerous challenges that will inevitably need to be addressed if DAOs are to become widely integrated within existing regulatory frameworks. Issues such as know-your-client (KYC) and anti-money laundering (AML) provisions, tax, corporate governance, forks, scalability and security are likely to be of primary concern to the regulators.

As with all disruptive technology, one hopes that ultimately an appropriate balance is struck between regulation and innovation.

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