Decentralized Autonomous Organizations: Governance Using Blockchain and Smart Contracts

Mitigating Ownership Risk, Limitations of DAO in Litigation, Ability to Raise Capital

Recording of a 90-minute CLE video webinar with Q&A

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Conducted on Thursday, June 16, 2022

Recorded event now available

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Course Materials

This CLE course will discuss an emerging new form of organization, the decentralized autonomous organization (DAO). The panel will discuss how blockchain and smart contracts permit this novel form of governance structure. The panel will discuss the risks and advantages of utilizing a DAO instead of, or in tandem with, a traditional entity like a corporation, LLC, or foundation.

Description

Due to the growing decentralized finance (DeFi) movement, a desire to use blockchain to eliminate intermediaries, and tighter governmental regulation over digital assets and cryptocurrencies, DAOs have emerged as a new way to form and structure business relationships. DAOs are run autonomously and allow individuals to work with like-minded people worldwide, governing through the use of tokens or other digital assets. A DAO's control and governance functions are distributed horizontally across its members, eliminating or reducing the need for a central authority and thus making them attractive to DeFi enthusiasts and Web3 projects.

Regulating DAOs presents a unique issue of legal identity due to the lack of formal legal recognition, which implicates a serious question of "off-chain" liability and legitimacy for a DAO and its members. Wyoming tried to address this issue by enacting a law that "is designed to allow DAOs to fit within an LLC structure," intended to combat the concerns of DAO members regarding personal liability under the current widespread "general partnership" principles. Numerous other creative solutions have been developed by jurisdictions as well as the DAOs themselves to help limit this liability, often through the structuring of "wrappers" that connect a Web3 DAO to a Web2 world.

Another legal identity issue for DAOs is their inability to enter into contracts or enforce their legal rights in litigation. Due to the absence of legal recognition, there is no entity with standing to serve as plaintiff. There can also be no recourse in the event of a contract breach due to a DAOs reliance on smart contracts for internal governance matters, which in and of themselves generally lack legal enforceability. Therefore, for the DAO and its members, a push for legal recognition through some type of "off-chain" entity may be essential for its sustained existence in today's markets.

Though faced with current and impending entity and securities regulation, DAOs still offer a unique way for groups of like-minded individuals worldwide to crowdfund their business ideas and create an organization that aligns with their collective goals. DAOs were made to operate as a self-regulated organization that strives to connect the sometimes revolutionary ideas of their members and allow for a decentralized governance system without bias from a smaller pool of individual decisionmakers. Limiting the decentralization and autonomous aspects could have unintended consequences that diminish the reasons that attract many people to DAOs.

Listen as our authoritative panel discusses this emerging form of business structure, how to mitigate risks for DAO participants and treasuries, raise capital in a decentralized manner, enforce contracts, and proceed with litigation.

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Outline

  1. Decentralized autonomous organizations
    1. Establishing via blockchain
    2. Smart contracts
  2. Limitations of DAOs
    1. Ownership liability
    2. Lack of plaintiff
    3. Inability to enforce a contract
    4. Anti-money laundering law compliance
    5. Connecting with the traditional financial system
  3. Advantages to traditional business forms
    1. Democracy
    2. Immutability
    3. Decentralization
  4. Structuring of DAO "wrappers"
    1. Wyoming
    2. International solutions
  5. Regulations
    1. Crypto tax reporting

Benefits

The panel will address these and other key issues:

  • How is a DAO established?
  • What are the limitations of using a DAO as a business structure?
  • What are the advantages of using a DAO?
  • What are some of the novel concepts emerging from DAOs?
  • What pending legislation and regulations are affecting the use of DAOs?

Faculty

Bench, Jonathan
Jonathan Bench

Attorney
Harris Bricken

Mr. Bench is chair of the firm’s corporate practice group, where he helps public and private companies with...  |  Read More

McAvoy, Daniel
Daniel L. McAvoy

Shareholder; Co-Chair FinTech and Blockchain Practice
Polsinelli

Mr. McAvoy takes a practical and knowledgeable approach to the law of digital assets, private funds, securities, and...  |  Read More

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