Existing Laws Sufficient for DAOs, Says UK Law Commission in New Report
The Law Commission of England and Wales has published a scoping paper on Decentralized Autonomous Organizations (DAOs), concluding that there is no immediate need for DAO-specific legislation. The commission, an independent statutory body responsible for law reform recommendations, suggests that DAOs can be accommodated within existing legal and regulatory frameworks.
In its report, the Law Commission highlights the lack of consensus on what constitutes a DAO, making it challenging to develop a single legislative approach. The diverse nature of DAO structures, ranging from pure DAOs to hybrid arrangements and digital legal entities, further complicates the creation of blanket regulations. Instead, the commission proposes that DAOs should be regulated based on their specific activities and characteristics.
The report suggests that many DAOs could fall under existing regulations, such as the Financial Services and Markets Act 2000. For instance, if a DAO's governance tokens resemble shares, grant voting rights, and are issued in exchange for investment, they may be considered specified investments under current law. Additionally, the promotion of such tokens could be subject to existing rules preventing unauthorized companies from soliciting UK customers.
Regarding taxation, the Law Commission notes that some DAOs may be required to pay corporation tax. However, given the global nature of many DAOs, the report calls for international cooperation to develop a comprehensive Anti-Money Laundering (AML) and tax framework for these organizations.
The commission also recommends a review of the Companies Act 2006 to determine whether reforms are needed to facilitate the increased use of technology in corporate governance. This review would aim to accommodate DAOs operating as limited liability partnerships and explore the potential for creating flexible governance options for non-profit DAOs.
While the report does not recommend immediate DAO-specific legislation, it does identify areas for potential future work. These include a review of trust law to consider more flexible trust-like structures and an examination of AML regulations to ensure compatibility with distributed ledger technology.
The Law Commission's findings suggest that the legal status of DAOs in the UK will depend on their specific structure and activities. Pure, decentralized DAOs could still be subject to civil actions, regulatory enforcement, or criminal prosecution. Importantly, the report notes that smart contracts can constitute legal contracts, potentially exposing DAO participants to legal liabilities.
