States recognizing DAOs as they embrace blockchain
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Utah is the latest to recognize decentralized autonomous organizations as legal entities, as state leaders wrestle with the future of smart contracts and corporate governance.
As states slowly embrace decentralized autonomous organizations as a new method of corporate governance and reckon with the potential impacts of blockchain technology, a handful are on a path to legally recognizing DAOs.
The Utah State Legislature passed a bill earlier this month to provide DAOs with legal recognition and limited liability, calling them “Utah LLDs,” similar to limited liability companies (LLCs), which is how private companies are traditionally structured in the United States. The bill now heads to Republican Gov. Spencer Cox for his signature or veto.
Favored by fans of cryptocurrency, DAOs do not have a central authority like traditional businesses, which are typically governed by a board of directors and C-level executives who are responsible for decisions. Instead, power is distributed to individual members of the DAO—who own digital tokens to be participants and who make decisions and cast votes as a collective. DAOs have been hailed as a more bottom-up, democratic method of corporate governance.
All votes and activity of a DAO are posted on a blockchain and so are publicly viewable. DAOs have been formed to streamline cryptocurrency transactions, but they can also facilitate smart contracts and other decentralized business decisions.
Utah would be one of a small minority of states so far to recognize DAOs as legal entities. Vermont was the first to do so in 2018, when lawmakers created a specialized entity known as a “blockchain-based limited liability company.” Then Wyoming and Tennessee followed suit with regulations of their own to accommodate DAOs in business law.
Meanwhile, New Hampshire’s Commission on Cryptocurrencies and Digital Assets recommended in its own report this year that the state offer limited liability protections to DAOs.
The embrace of DAOs from Utah lawmakers comes as states look at the possibilities of blockchain and how to attract businesses that take advantage of the technology.
“State governments are still in the early educational stages of learning about blockchain,” said Miles Fuller, head of government solutions at tax compliance software company TaxBit. “You have some people, particularly state legislatures, that see this as the wave of the future, a technological infrastructure that can be very beneficial to society.”
Fuller added that states are less concerned about blockchain’s use for cryptocurrency and more about “how the technology can become the backbone for better transparency and less friction in transactions between people and at the state level.”
Other states interested in blockchain’s potential are also exploring the potential of DAOs. In its report on the technology last year, the Texas Work Group on Blockchain Matters called on the state legislature to avoid crafting entity-specific laws for DAOs, so as to recognize the “significant flexibility” of DAOs and not reduce the entity options available to them.
In an interview at the time, Carla Reyes, the work group’s chair, said DAOs could “flatten the governance structure” and make production more profitable for the people involved. For example, it could help incentivize artists, who traditionally have had low returns on their investment, she said.
A Wyoming DAO known as American CryptoFed, the first to be legally recognized in the state and the nation, hit an obstacle earlier this year when it became the subject of an enforcement action by the Securities and Exchange Commission after it tried to register its two tokens. Company officials reportedly said they are not concerned about the SEC’s action.
Interestingly, Wyoming was the first state to enact a law creating LLCs, when it did so in 1977 based on plans designed by the Hamilton Brothers Oil Company. LLCs were slow to catch on nationwide due to questions from the IRS over how they would be treated in federal tax law. By 1996, every state had its own LLC law.
Fuller said the growth of DAOs at the state level is moving faster than the expansion of LLCs did, partly because the blockchain technology that underpins DAOs is a “shiny object” that legislators believe could have “powerful value.” He also noted that lawmakers may see DAOs’ structure as aligning with the “evolving cultural values for our citizenry that they want more engagement directly with management” and more transparent corporate decision-making.