From July, Decentralized Autonomous Organizations (DAOs) can be registered as LLC in the US state of Wyoming. That should strengthen the legal status of DAOs — and protect the members from unexpected liability claims.
After Wyoming Governor Mark Gordon has signed Bill 38, the Wyoming Limited Liability Company Act will also apply to DAOs from July 1st. This means that DAOs can become full legal entities for the first time, which from a legal point of view amounts to a revolution.
What that means in concrete terms, however, is not easy to understand. To do this, we first have to clarify the two key terms: DAOs and LLCs.
A “decentralized autonomous organization” means an organization-like structure through which various actors connect on a voluntary basis in order to fulfill certain, previously defined tasks, whereby the cooperation is structured algorithmically, for example, through a smart contract, and as an operation on the blockchain completely is transparent.
DAOs are best known for Ethereum, where a smart contract sets the rules by which actors unite, for example, when they provide liquidity for the decentralized exchange Uniswap. But the Bitcoin miners also basically form a DAO, just like every real cryptocurrency MUST be a DAO.
DAOs form, and that is the essential point, a company without a company. They allow different parties to decide in a structured way about the use of money and other resources — without the need for a legal registration or a physical location where the organization is based. The code replaces the law, the smart contract the company..
The Limited Liability Company (LLC), on the other hand, is a legal form for companies that was developed in 1977 — aptly by the government of Wyoming. The LLC is, according to Wikipedia, “a US-specific form of private limited liability company” that is known for its flexibility. It connects, adds Investopedia, “the characteristics of a company with those of a partnership or pure participation.
How does one go together with the other? At first, glance, not at all.
Because a DAO is a form of organization that evades legal forms. No place to register, no court to have jurisdiction, and no manager to be responsible. But maybe that’s not even necessary: every interaction is completely transparent and is governed incorruptibly by a smart contract. As a result, there is far less potential for fraud and abuse than there is with businesses.
The DAO does what the DAO does. Not more but also not less.
So why should members of a DAO register an LLC? At its core, it’s about responsibility. As long as the legal position of a DAO is unclear, its members face enormous liability damage in the worst case.
“The rights of members in a DAO can be materially different from the rights of members of an LLC,” explains the bill. Where members of an LLC are very limited in their liability, there is no guarantee that members of a DAO will not be fully liable.
Registration as an LLC exempts them from this. This allows namely “to define, reduce or eliminate fiduciary duties” and “limit the transfer of property rights, as well as the resignation of members, their exit, the return of capital contributions and the dissolution of the DAO.”
In other words: an LLC can put a “legal layer” on top of the code layer, which prevents or limits what the code allows if it contradicts the law. Above all, however, the LLC allows members or developers of a DAO to eliminate unpleasant liability risks and fiduciary obligations in a legally secure manner.
So when someone registers their DAO in Wyoming as an LLC, they no longer have to worry about being held liable by a court in the future. Because at the now competent court, Wyoming, the members of the DAO were released from liability in black and white.
However, not every DAO can become an LLC. The law distinguishes between DAOs that are managed by members and those that are managed by algorithms. Algorithmically managed DAOs can only register as LLC if “the underlying smart contracts can be updated or changed.”
In other words: only if a decentralized autonomous organization is not completely decentralized, it may become an LLC. Bitcoin miners are not allowed to because they cannot change the contract — the Bitcoin code; on the other hand, smart contracts such as Uniswap, which the developers can change, are allowed.
The reactions to the new law vary. The fintech investor Caitlin Long, as a former member of the Wyoming Blockchain Taskforce, not entirely neutral, celebrates it on Twitter.
“Thank you, Legislator and Governor Gordon for building on Wyoming’s story of inventing the LLC which all other states followed about a decade later. We do it again!
What problem does the Wyoming DAO law solve? It is the problem of joint debt for all participants in a DAO when the DAO is declared to be a general partnership by a court.”
The collective debt: “Joint and several liabilities” quote Wikipedia: “Joint debt of several legal subjects with regard to a performance from a uniform debt relationship,” whereby “every debtor is obliged to provide the entire performance.” Example: A married couple took on debt together. If the man dies, the woman is fully liable. In the case of a DAO, it would mean that a single member would potentially be liable for the entire debt of the DAO.
Wyoming law mitigates this threat. However, as Long explains, “The KEY is that the Secretary of State of Wyoming can remove liability if a DAO commits fraud or engages in other illegal activities.” So the law is only useful for honest projects.
Preston Byrne, a US lawyer with a focus on Bitcoin and cryptocurrencies, reacts much less euphorically: “Scrap this draft.”
His anger is directed less against the law than against DAOs in general: “‘DAO’ is a language that token peddlers use to justify selling shitcoins and half-baked code. They are not going to register an LLC because they do not want their members to be identity checked and they want to be held responsible for what their DAO does. Doesn’t support this behavior too. “
That the law allows an “algorithmically managed DAO” to be registered as an LLC is what he calls “an abomination.” Asks Byrne, what if we have a DAO LLC that is ‘algorithmically managed’ with anonymous members vote in favor of creating a market for contract killings? Who is responsible?”
Of course, the notion is unsettling. However, such a market will not depend on being able to register as an LLC, and one should also ask why Byrne is suing DAOs for this possibility, but not Bitcoin. In general, Byrne’s perception seems clouded by an aversion to DAOs, which is why his criticism seems alarmist and old-fashioned.
“Businesses should be founded and managed by people,” he writes, “they exist to protect people who work together. DAOs, at least at this time, protect their members through obfuscation and anonymity. The state does not have to intervene to put an entrepreneurial veil on them.”
There is, of course, a lot of ignorance in this statement. The many DeFi DAOs that exist today — Uniswap, PancakeSwap, Compound, Curve, Aave, and so on — are not primarily intended to offer members anonymity. Rather, they are recreating financial services in a way that members participate more effectively in the income and reduce costs by streamlining organizational structures.
With this point of view, Byrne seems just as ignorant as those who claim that cryptocurrencies are only good for laundering money — and it obstructs his view of a legal revolution that is also a revolution in the nature of the company.
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