A study released on July 11 by the UK’s Law Commission says that decentralized autonomous organizations (DAOs) should be regulated by the country’s current tax and financial rules. The commission’s report clarifies that setting up a separate regulatory body for DAOs is unnecessary. Still, it does suggest that the issue be “kept under review.”
The study paper pointed out that there isn’t a single agreed-upon definition of a DAO. It also said that the ecosystem often changes how it works to meet the needs of local courts. The panel named different kinds of DAOs, like pure DAOs, hybrid arrangements, and digital legal entities. Each type needs a different way of being regulated.
The report said that the rule that applied to a DAO would depend on its type. For example, the Financial Services and Markets Act 2000 could apply to some DAOs if they do certain things linked to certain investments. This includes DAOs that give out governance tokens like shares and give investors the right to vote in exchange for money. Also, if these tokens are promoted, they might be controlled by the UK’s rules on promotions that are meant to keep customers safe.
Some DAOs could be seen as unincorporated associations, groups working together for a shared goal but lacking their own legal identity. These groups can’t own property, sign contracts, or be sued in their own names, so lawsuits must be brought against specific members or leaders.
UK Law Commission Challenges In Regulating DAOs Amidst Evolving Legal Landscapes
After thinking about it, the Law Commission decided that a single set of rules might not work for DAOs at this point in their growth. The report says, “We do not, at least at this relatively early stage in the development of DAOs, recommend the development of a bespoke legal framework for DAOs in England and Wales.”
However, the commission said that even if a DAO is “pure” and fully decentralized, it could still be sued in civil or criminal court if it uses smart contracts, which “can constitute a legal contract.”
The legal standing of DAOs was previously examined, like in the class action lawsuit against the bZx protocol after it was hacked in 2021. The bZx DAO was considered an unincorporated group by the Commodity Futures Trading Commission (CFTC). In February 2022, the Republic of the Marshall Islands also accepted DAOs as legal entities, and the state of Wyoming did the same thing the same month.
In a related development last year, U.S. Senator Elizabeth Warren said she planned to introduce the Digital Asset Anti-Money Laundering Act of 2022. This bill would include DAOs in the rules against money laundering (AML).
The Law Commission’s report stresses the changing regulation of DAOs and the importance of adapting current legal frameworks to accommodate these new types of organizations. Regulatory bodies worldwide must stay alert and adapt to the unique problems that DAOs bring as they continue to grow and change.
