The legal status of entities playing a significant role in the crypto asset market is to be investigated in a very topical investigation by the Law Commission of England and Wales. In a call for evidence released today, the commission is asking for evidence on how Decentralized Autonomous Organizations (DAOs), bodies created and managed online by rules maintained on a cryptographic blockchain, should be characterized.
The announcement comes amid a crisis in global crypto markets following the $32 billion collapse of Bahamas-based trader FTX.
According to the Law Commission announcement, the legal status of DAOs is ambiguous. Although DAOs are sometimes equated with existing legal forms, such as general partnerships or unincorporated associations, they often have several different characteristics and elements that could distinguish them from existing forms.
Some DAOs include a recognized legal form or incorporated entity, while many are involved in the development of code used to create so-called smart or self-executing contracts. Many DAOs also use smart contracts to automate or program certain elements of their internal business.
Few DAOs appear to be structured using the law of England and Wales, the commission says. “Huge amounts of value flow, are created, used and sometimes lost by DAOs. This raises questions about their legal status, the responsibilities of those involved, and the rules and regulations that apply.
Professor Sarah Green, Law Commissioner for Commercial Law and Common Law, said: ‘DAOs would provide multiple benefits to market players, incentivizing cooperation and innovation, leveling the playing field, reducing risks of human error, reducing costs and increasing transparency. Yet their legal and regulatory status is unclear.
“Our work will aim to build consensus on the best ways to describe the building blocks of DAOs and highlight ways in which the law of England and Wales could support their development.”
The call for evidence is open until January 25, 2023 and will contribute to a government-commissioned scoping report.