States that recognize DAOs when they embrace blockchain

As states slowly embrace decentralized autonomous organizations as a new method of corporate governance and anticipate the potential impacts of blockchain technology, a handful are moving to legally recognize DAOs.

The Utah State Legislature passed a bill earlier this month to give DAOs 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 goes to Republican Governor Spencer Cox for his signature or veto.

Preferred by cryptocurrency fans, DAOs do not have a central authority like traditional businesses, which are usually 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 are therefore publicly visible. DAOs have been formed to streamline cryptocurrency transactions, but they can also facilitate smart contracts and other decentralized business decisions.

Utah will 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 corporation.” Subsequently, Wyoming and Tennessee followed suit with their own regulations 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 protection to DAOs.

The embrace of DAOs by Utah lawmakers comes as states look to the possibilities of blockchain and how to attract businesses that take advantage of the technology.

“Governments are still in the early stages of learning about blockchain,” said Miles Fuller, head of government solutions at tax compliance software company TaxBit. “You have some people, particularly state legislators, who see this as the wave of the future, a technological infrastructure that could 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 greater 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 urged the state legislature to avoid creating entity-specific laws for DAOs, 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 task force’s leader, said that DAOs could “even out the governance structure” and make production more profitable for those involved. For example, it can help stimulate artists, who have traditionally had a low return on investment, she said.

A Wyoming DAO known as American CryptoFed, the first to be legally recognized in the state and nation, hit a roadblock 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 pass 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 because of questions from the IRS about how they would be treated in federal tax law. By 1996, each state had its own LLC law.

Fuller said the growth of state-level DAOs is moving faster than the expansion of LLCs did, in part because the blockchain technology that underpins DAOs is a “shiny object” that lawmakers believe could have “powerful value.” He also noted that lawmakers may see the DAO’s structure as consistent with “evolving cultural values ​​for our citizens that they want more engagement directly with management” and more transparent corporate decision-making.