Starting in July, Decentralized Autonomous Organizations (DAOs) will be able to file as LLCs in the state of Wyoming. This should strengthen the legal status of DAOs – and protect members from surprise liability claims.
After Wyoming Governor Mark Gordon signed Bill 38 into law, the Wyoming Limited Liability Company Act will apply to DAOs as of July 1. This will allow DAOs to become full-fledged legal entities for the first time, which is tantamount to a revolution in legal terms.
What this means in concrete terms, however, is not easy to understand. To do so, we first need to clarify the two core concepts: DAOs and LLCs. A “decentralized autonomous organization” means an organization-like entity through which different actors connect on a voluntary basis to perform certain predefined tasks, where the collaboration is algorithmically structured, such as through a smart contract, and is fully transparent as an operation on the blockchain.
DAOs are best known through Ethereum, where a smart contract sets the rules by which actors unite, such as when they provide liquidity to the decentralized exchange Uniswap. There are a lot of other exchanges and brokers on the market which can be found at BestBitcoinBroker.
But Bitcoin miners also basically form a DAO, just as any real cryptocurrency MUST be a DAO. DAOs form, and this is the essential point, a company without a company. Through them, different parties can decide in a structured way on the use of money and other resources – without there being a legal registration or a physical place where the organization is domiciled. The code replaces the law, and the smart contract replaces the company.
The Limited Liability Company (LLC), on the other hand, refers to a legal form for businesses that was developed in 1977 – appropriately enough, by the Wyoming government. According to Wikipedia, the LLC is “a U.S.-specific form of private limited liability company” known for its flexibility. It combines, Investopia adds, “the characteristics of a corporation with those of a partnership or pure participation.” One can compare the LLC to the German GmbH, with the states being more flexible in the specific design.
How does one fit with the other? At first glance, not at all. After all, a DAO is precisely a form of organization that eludes legal forms. There is no place where it is registered, no court that has jurisdiction, and no managing director who is responsible. But perhaps that’s not even necessary: every interaction is completely transparent and governed incorruptibly by a smart contract. Therefore, there is much less potential for fraud and abuse than with corporations.
The DAO does what the DAO does. No more, but also no less. Finally, no more liability! So why should the members of a DAO register an LLC? At its core, it’s about liability. As long as a DAO’s legal position remains unresolved, its members face enormous liability damage in the worst-case scenario.
“The rights of members in a DAO may be materially different from the rights of members in an LLC,” the bill explains. Where members of an LLC are very limited in their liability, there is no guarantee that members of a DAO will not be fully liable.
Filing as an LLC exempts them from this. Indeed, this allows “fiduciary duties to be defined, reduced or eliminated,” as well as “the transfer of ownership rights to be limited, as well as the resignation of members, their withdrawal, the return of capital contributions and the dissolution of the DAO. In other words, an LLC can put a “legal layer” on top of the code layer that prevents or restricts what the code allows if it conflicts with the law. Most importantly, the LLC allows the members or developers of a DAO to legally remove unpleasant liability risks and fiduciary duties.
So, if someone registers their DAO in Wyoming as an LLC, they no longer have to worry about being held liable by a court in the future. That’s because in the court location that now has jurisdiction, Wyoming, DAO members have been relieved of liability in black and white. However, not every DAO can become an LLC. The law distinguishes between DAOs managed by members and those managed by algorithms. Algorithmically managed DAOs can only register as an LLC if “the underlying smart contracts can be updated or modified.
In other words, only if a Decentralized Autonomous Organization is not fully decentralized may it become an LLC. Bitcoin miners may not because they cannot change the contract – the bitcoin code; in contrast, smart contracts like Uniswap, which developers can change, may.
Only suitable for honest projects
Reactions to the new law vary. Fintech investor Caitlin Long, not entirely neutral as a former member of the Wyoming Blockchain Taskforce, celebrates it on Twitter: Thank you, legislators and Gov. Gordon, for building on Wyoming’s history of inventing the LLC, which all other states followed about a decade later. We’re doing it again! What problem does Wyoming’s DAO law solve? It is the problem of joint and several liability for all participants in a DAO when the DAO is declared a general partnership by a court.
The Wyoming law mitigates this danger. However, it should not be viewed as a carte blanche, as Long explains, “The KEY is that the Wyoming Secretary of State can remove liability protection if a DAO commits fraud or engages in other illegal activity.” Therefore, he said, the law is only useful for honest projects.
An Abomination
Preston Byrne, a U.S. attorney with a focus on Bitcoin and cryptocurrencies, is much less euphoric: Scrap this bill.
But his anger is directed less at the bill than at DAOs in general: ‘DAO’ is language that token peddlers use to justify selling shitcoins and half-baked code. They won’t register an LLC because they don’t want to subject their members to identity verification and be held accountable for what their DAO does. Don’t support this behavior as well. That the law allows an “algorithmically managed DAO” to register as an LLC, he calls “an abomination.” What if, Byrne asks, “we have a DAO LLC that is ‘algorithmically managed’ and where the anonymous members vote to set up a market for contract killings? Who is responsible?
Of course, this notion is troubling. However, such a market will not depend on being able to register as an LLC, and one should also ask why Byrne indicts DAOs for this possibility but not Bitcoin. In general, Byrne’s perception seems clouded by a distaste for DAOs, which is why his criticism seems alarmist and old-fashioned. Companies are supposed to be created and managed by people,” he writes, “they exist to protect people working together. DAOs, at least at this time, protect their members through concealment and anonymity. The state does not need to intervene to put an entrepreneurial veil on them.
Admittedly, a lot of ignorance resonates in this statement. The many DeFi DAOs that exist today – Uniswap, PancakeSwap, Compound, Curve, Aave, and so on – are not primarily in the business of providing anonymity to members. Rather, they are remaking financial services in ways that allow members to share in the rewards more effectively and reduce costs by streamlining organizational structures.
With this view, Byrne seems as ignorant as those who claim cryptocurrencies are only good for laundering money – and it obscures his view of a legal revolution that is also a revolution in the nature of the firm.