Law Commission publishes scoping paper on decentralised autonomous organisations

On 11 July 2024, the Law Commission for England and Wales published a scoping paper on decentralised autonomous organisations (DAOs). This follows on from (and is informed by responses to) a call for evidence published in November 2022.

The paper considers what DAOs are and how they can be characterised in law and seeks to identify current issues to inform any future law reform or innovations that might be required to clarify their status and facilitate their uptake. The paper is designed to be an introduction to the topic and as it is addressed primarily to the Government, it focuses on the aspects of DAOs that are significant for policy and legal purposes – although the Law Commission has not (at this stage) been asked to make formal recommendations for reform.

Whilst DAO-specific legal entities have recently been introduced in some jurisdictions, in the Law Commission’s view it is not necessary to develop such an entity for England & Wales – partly because there is not a consensus around what it should look like and partly because of the general desirability of organisational law remaining technology neutral – although it notes that the Government should keep this matter under review.

However, the paper does identify a number of next steps and areas where further work might be useful to accommodate DAOs, if this were thought desirable, and to ensure that their activities are within the reach of the regulatory regime. These include:

• Proceeding with the Law Commission’s planned review of trust law under the law of England and Wales. This will consider (in general terms rather than in the DAO context specifically) the arguments for and against the introduction of more flexible trust and trust-like structures in England and Wales.
• Considering the case for the introduction of a limited liability, not-for profit association with flexible governance options and separate legal personality – similar to the unincorporated non-profit association (UNA) structure sometimes used in the US by DAOs and other organisations.
• Reviewing company law (and the law applicable to other incorporated entities such as Limited Liability Partnerships) to identify reforms that would make it easier for organisations to leverage distributed ledger technology (DLT) and other technology at governance level. The paper identifies some potential first steps such as consideration of legal changes facilitating share and fund interest tokenisation and automated member registers.
• Reviewing anti-money laundering regulation to consider whether its policy objectives can be achieved in a way that is more compatible with the use of DLT and other technology.
• Considering clarifying the position of DAOs and Collective Investment Schemes (as defined in the Financial Services and Markets Act).
• Considering (at an international level) whether an international tax framework for DAOs should be developed given their cross-border nature.

The paper also notes that future work considering any expansion of the regulated activities framework would benefit from explicitly contemplating DAOs and how they use tokens at a governance level.