The US cryptocurrency regulation aims to bring greater clarity to DAOs

On June 7, US Senators Cynthia Lummis and Kirsten Gillibrand launched the long-awaited Responsible Financial Innovation Act, proposing a comprehensive set of regulations addressing some of the biggest issues facing the digital assets sector. By providing comprehensive guidance to the fast-growing industry, the bill offers a bipartisan response to President Biden’s call for a holistic approach to crypto regulation.

Among the many proposals, the bill establishes basic definitions, provides an exception for digital currency transactions and harmonizes the roles of the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), delimits regulatory swimming pools and provides significant jurisdiction. extension to CFTC.

The bill is perhaps most productively seen as an invitation to further dialogue. In the coming months, the success or failure will largely be determined by the strength of the debates it generates. It has already provoked strong reactions from the industry. One of the most debated – and potentially effective – parts of the legislation concerns decentralized autonomous organizations (DAOs). Although the law helpfully clarifies elements of DAO policy, further action is required to answer the remaining questions about legal status, applicable laws and jurisdiction.

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What are DAOs and why are these regulations important?

DAOs are bodies that use blockchains, digital assets, and associated technologies to collaborate, allocate resources, manage activities, and make decisions. By making operational and financial information publicly visible and giving members the opportunity to propose, vote on and directly ratify changes in organizations, DAO offers a way to decentralize the operation of companies. The groundbreaking law on responsible financial innovation will address fundamental issues of DAO policy, including defining DAOs, establishing incentives for incorporation and bringing them into tax law.

In recent years, DAOs have experienced radical growth. According to the data analysis website DeepDAO, in 2021 alone, the total value of DAO taxes skyrocketed forty times, from $ 400 million to $ 16 billion, and the number of participants increased 130 times from 13,000 to 1.6 million. DAOs are currently being developed to achieve a variety of goals, including managing financial services, facilitating networking and managing philanthropic activities. DAOs are even used to provide support in war zones.

“2021: DAO’s (first) year”

Here’s how the DAO ecosystem grew over the last 12 months:

DAOs’ treasury listed on @DeepDAO_io went up 40 times, from $ 400 million in January to $ 16 billion by December 2021

Participants in DAOs went up 130 times, from 13,000 in January to 1.6 million by December 2021 pic.twitter.com/YFcblpBOK8

– DeepDAO.io (@DeepDAO_io) December 30, 2021

With DAOs growing so fast, some forecasters predict that the new organizational form could expand to one trillion dollars in assets under management by 2032, affecting fields as diverse as investment, research and philanthropy. DAOs can offer a number of benefits, including greater equity and reduced censorship.

In relation to traditional organizations such as companies, a report recently published by the World Economic Forum in collaboration with Wharton finds that DAOs can offer a way to achieve greater transparency, adaptability, trust and speed. Similarly, DAOs enable rapid experimentation and can be targeted at a variety of goals, including prosocial goals. On the other hand, today’s DAOs face challenges with voter engagement, governance, concentration of power and cyber security.

Related:Decentralization, DAOs and current Web3 issues

Perhaps most importantly, DAOs face regulatory uncertainty and fragmentation. In the United States, for example, DAOs face a Byzantine legislative landscape defined by several competing frameworks at the state level. Although these legislative approaches can create choices for DAOs, they also constitute an obstacle to compliance, and many have been criticized for their shortcomings. Without clear legal status, DAOs face operational limitations, cannot pay taxes and may expose members to unlimited liability.

How will the Lummis-Gillibrand Act affect DAOs?

Due to the indefinite nature of DAO policy, the Lummis-Gillibrand Act may be particularly meaningful for the new form. The bill proposes to amend the Internal Revenue Code of 1986 to incorporate DAOs, and to define them as governing organizations “[….]primarily on a distributed basis, “is properly integrated and uses smart contracts – automatic debt code execution – to generate collective action. Although this attempt to define DAOs may seem insignificant at first, the effects can be far-reaching.

It is crucial that the bill defines DAOs in connection with amendments to the Tax Act. The development of tax claims for DAOs can give legitimacy to the new form. However, doing so could also create new obligations, including incorporation under specific jurisdictions that could pose a challenge for global-footed DAOs. Expert interpretations of the bill’s significance for DAOs are mixed.

Related: Decentralized autonomous organizations: Tax considerations

While some argue that incorporation, for example, could foist requirements for DAOs, others argue that the bill does not mandate that all DAOs must be incorporated, but instead only makes it an alternative for those who want to take advantage of tax opportunities. As this debate suggests, the final significance of the bill for DAOs is far from clear. In fact, many of the implications will depend on the results of a series of review processes and polls.

Although the bill is being promoted by a two-pronged pair of political decision-makers with seats on critical committees, including Senate Agriculture and Banking Committees, Senators Lummis and Gillibrand have argued that up to four Senate committees will eventually have jurisdiction over legislation. Nevertheless, the very existence of the bill is commendable for the attempt to provide clarity to the emerging sector.

In a recent comment, Senator Lummis himself claimed that “[the bill] is an important step towards securing America’s economic leadership for generations to come. ” By providing comprehensive guidance on digital assets, legislation has already made progress.

For DAOs, it has begun to address many of the issues that builders have struggled with for years. But for the senators’ vision to be realized, DAO policy, among other things, will have to be fought with and ultimately promoted meaningfully. Now it is up to industry leaders, decision makers and others in the ecosystem to work together to develop the effective policies that are suitable for the purpose required for this nascent organizational structure to thrive.

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