Law Commission publishes scoping paper on Decentralised Autonomous Organisations

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Today, the Law Commission has published a scoping paper looking into how Decentralised Autonomous Organisations (DAOs) can be characterised and how the law of England and Wales might accommodate them now and in the future. The paper seeks to identify current issues around DAOs to inform any future law reform or innovations.

The term “DAO” describes, in very broad terms, a new type of online organisation using rules set out in computer code. They are part of what is sometimes called the “crypto ecosystem”. A DAO will generally bring together a community of participants with a shared goal – whether profit-making, social or charitable – often with some control over governance matters distributed among participants through the use of distributed ledger technology (DLT) and smart contracts.

The term DAO does not necessarily indicate a particular type of organisational structure and, therefore, cannot imply any specific legal treatment.

Commissioner for Commercial and Common Law, Professor Sarah Green said,

“Digital Autonomous Organisations are internet-based entities that are difficult to define and to align with existing legal forms. There is even disagreement as to what can properly be called “a DAO”. In this paper we look at a wide range of different types of arrangements that might use the term, giving rise to different legal questions. Our aim in this paper is twofold:  to analyse the current legal implications of DAOs and to explore how the law might develop in the future to accommodate them.”

The scoping paper explains what DAOs are and describes the current treatment of DAOs under the law of England and Wales. It identifies how the current law might respond to, or facilitate, DAOs. Our work focuses on the aspects of DAOs that are significant for policy and legal purposes rather than providing detailed descriptions of their technical features. The paper:

  • Provides a “beginners’ guide” to DAOs which explains their philosophical development and underlying technology and introduces the concept of a spectrum upon which we identify three types of arrangements: pure DAOs, hybrid arrangements and digital legal entities.
  • Discusses the possible legal characterisation of DAOs under the law of England and Wales, including how liability might be attributed to a DAO or its participants where it does not consciously use legal entities in its structure.
  • Discusses the different legal entities that might be used as part of a DAO’s structure in what we call a “hybrid arrangement”.
  • Considers of the overall attractiveness of England and Wales as a jurisdiction for DAOs.
  • Discusses areas of regulation in England and Wales that may affect DAOs, including money laundering and financial services regulation and taxation.

The paper also identifies areas where further work might be useful to accommodate DAOs, if this were thought desirable, and to ensure that their activities are within the reach of the regulatory regime. The paper suggests:

  • There is no current need to develop a DAO-specific legal entity for England and Wales, however, the Government should keep this matter under review.
  • The Companies Act 2006 should be reviewed in order to determine whether reform is needed to facilitate the increased use of technology at a governance level where appropriate. The law of other business organisations such as LLPs should also be reviewed with the same aim.
  • Further work could be undertaken to determine whether the introduction of a limited liability not-for-profit association with flexible governance options would be a useful and attractive vehicle for organisations in England and Wales, including non-profit DAOs.
  • Proceeding with the Law Commission’s planned review of trust law under the law of England and Wales. This will consider – in general terms rather than in the DAO context specifically – the arguments for and against the introduction of more flexible trust and trust-like structures in England and Wales.
  • Government should consider a review of anti-money laundering regulation in England and Wales to consider whether the same policy objectives can be achieved in a manner more compatible with the use of DLT and other technology.

A full list of the suggestions for future work can be found in chapter 7 of the scoping paper.

A summary of the paper is available here and the full paper is available here.

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