Last month, the state of Utah passed a bill that grants a decentralized autonomous organization the legal equivalent of a domestic limited liability company, which is a hybrid between a corporation and a partnership that has some tax benefits and shields LLC members from incurring losses of the company. 

“The Utah bill provides a legal definition of what a DAO is,” said Ashley Caines, a DAO contributor and the current head of Community and Content at Decent DAO – an on-chain venture studio that’s working to decentralize institutions. 

The Utah bill, which goes into effect on Jan. 1, 2024, builds on legislation passed by Wyoming and Tennessee. Previous bills focused on how operating agreements should be structured and brought forward the concept of having two different DAO structures – one for automated DAOs that run on a protocol and one for human-operated DAOs. 

The Utah bill allows DAOs “to enter into contracts, hold assets, be sued or sue in court, and introduces security regulations,” Caines said. “Wyoming and Tennessee didn’t address the token status, so that to me is the glaring difference in the Utah bill.” 

The central problem with DAOs is the massive legal risk, because the rules of the game haven’t been written. DAOs and the people who build, support and maintain them don’t know if they’re operating in compliance because that’s yet to be defined. 

Caines said the Colorado Cooperative Act is the closest existing analogue to the new legislation dealing with DAOs. The Act outlines how “limited liability associations” can distribute profits to members based on their participation and vote they can vote on governance matters. While cooperatives and DAOs share similar operational features, they are separate classifications, Caines said. 

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“The Colorado Cooperative Act is one of the best domestic laws or, at least legal structures, to reference when building a DAO,” Caines said.  She said the various state DAO bills should be thought of as rough drafts for what will soon hopefully be a federal effort. 

Caines said it's important to consider the objectives of the DAO to decide which jurisdiction to use. If a DAO is similar to a co-op, Colorado is better than Utah. But if a DAO operates like an LLC, Wyoming is going to be better because their laws more closely resemble LLC laws. 

Earlier this month, Harvard hosted a DAO symposium that sought to reach consensus on how DAOs should be viewed in the eyes of the law. The three-day conference was a round-table of industry leaders, policymakers, and scholars. 

Caines is working putting together a team to push forward on the first federal DAO policy. One area of special concern for her is around the law and DAO ethics. 

“There are a number of bills that speak to the tokenization, securities and what operating agreements look like,” Caines said. “But there’s an ethical angle to blockchain in general, especially in the DAO model, that I believe should be codified into the law. In an ideal world, communities won’t be able to legally classify as a DAO if they’re not compliant with the ethical definition of what that means.”

Too much legislation from states risks fragmenting the thinking on how DAOs should be treated under the law. 

 The U.S. also faces competition from offshore locales that are making it easy and convenient to set up in their jurisdiction. One such location is the Marshall Islands, where registered legal entities can formally adopt DAO structures, identifying as DAO LLCs. This gives DAOs the same limited liability protection as an LLC. It extends to the assets of the DAO and  members who have had their identities verified have no fiduciary responsibility to the DAO whether it’s incorporated as a for-profit or non-profit entity. 

“There are very few scenarios, barring fraud, that members of DAOs incorporated in the Marshall Islands have any fiduciary or legal responsibility, should the entity be sued,” Caines said. “With international jurisdictions much friendlier to DAOs, the United States risks losing communities – especially those with a token on their roadmap.” 

The DAO-friendly policies in the Marshall Islands have been in effect for a little over a year and it’s unclear how many DAOs have taken advantage of them. Although the Marshall Islands is a sovereign nation, being offshore to the U.S. comes with drawbacks such as limited or restricted access to members. 

“All of these states and territories are introducing laws and taking bites out of the same apple, but we need to put our minds together and decide on the core elements legally that should lay the groundwork for how we see DAOs,” Caines said. “We’re building a new frontier and the people who least understand it are taking their best stab at what compliance could look like – which just looks like whatever they were using for the banking industry or traditional regulation. You’re either spending money in Washington to write laws or spending it in court to fight laws.”