Do DAOs need special laws? The UK Law Commission believes the time is not yet ripe

Table of Contents

The Law Commission of England and Wales: Existing Laws are Sufficient

The Law Commission of England and Wales, responsible for reviewing and advising the UK government on legal reforms, has stated that it does not recommend establishing a new legal framework for DAOs. This is because these organizations may already fall within existing regulatory frameworks, and if a company operates in the UK, it would need authorization under current regulations.

DAOs May Fall Under the Regulation of the Financial Services and Markets Act 2000

In a report released on Thursday, the Law Commission highlighted that if DAOs engage in "specified activities" related to "specified investments," they may be subject to the Financial Services and Markets Act 2000.

Under this law, when governance tokens that resemble stocks, confer voting rights, and are issued as investments in a DAO, these tokens may be considered "specified investments." "Specified activities" refer to specific behaviors or actions related to these investments, such as issuance, sale, promotion, etc.

The Law Commission of England and Wales Deems Uniform Legislation Inappropriate

Recently, the legal status of DAOs has garnered significant attention, and US courts are also exploring how to address these organizations. The Law Commission of England and Wales believes that due to differences among various DAOs, each DAO may be subject to different laws, and a uniform legislative approach may not be suitable.

The Commission stated that it is not advisable to establish a specialized legal framework for DAOs in the relatively early stages of their development due to a lack of consensus.

Legal Status of DAOs Varies by Type, Complete Decentralization Does Not Necessarily Mean Compliance

The report points out that the public laws applicable to DAOs depend on their types. Some may be classified as unincorporated associations where participants interact based on rules and are only accountable for their own actions. In certain cases, DAOs may need to pay corporate taxes, and the Commission suggests considering international tax frameworks.

From a litigation perspective, fully decentralized DAOs may still face civil suits from third parties, enforcement actions from regulatory agencies, or criminal prosecutions. The report's summary notes that "Smart Contracts can constitute legal contracts."

Law Commission Recommends Further Analysis

The Law Commission of England and Wales has previously assisted in drafting regulations promoting the digitization of documents, which have facilitated the application of distributed ledger technology in trade.

Earlier this year, the Commission sought opinions on a legislative proposal to categorize cryptocurrency as property. The report also suggests that institutions like the Jurisdiction Taskforce should conduct further analysis and recommends discussions among judiciary, law commissions, regulatory bodies, and other legal professionals to determine when Fiduciary security should apply to cryptocurrency developers.