Having been initially considered as the future of organizational governance in the crypto world, Decentralized Autonomous Organizations (DAOs) are now experiencing more legal and regulatory problems as the authorities are struggling to classify and regulate such entities.
A recent court decision in a well-known case of a DeFi platform has caused controversy among the members of the DAO, the legal position of which has become uncertain, as well as the liabilities of the participants. The case which involved the alleged violation of the securities law led to the conclusion that members of the DAO could be proceeded against personally.
This decision has consequential effects on the thousands of DAOs that are currently active in one way or another in the crypto space. The decision has raised a lot of controversies within the crypto space regarding the sustainability of DAOs as a form of governance.
DAO enthusiasts claim that such decentralised structures are a new paradigm in organisational governance, which enables more democratic decision-making. However, the opponents have argued that legal frameworks for DAOs remain ambiguous, and thus participants are vulnerable to various risks.
Due to the increasing attention from the authorities, several significant DAOs have started to look for the ways to legitimize themselves. Some are planning to incorporate as conventional legal structures in jurisdictions that accept crypto, while others are in the process of creating new models of hybrid structures that should retain the DAO’s decentralised nature, but still provide the participants with some legal safeguards.
The legal issues that DAOs encounter also have drawn demands for legal regulation from the experts in the industry and associations. They said that due to the lack of legal precedents on how DAOs should be governed under the existing laws, this sector could be discouraged.
Currently, there are some attempts to regulate the status of DAOs; for instance, in Wyoming, USA, they have already started the process of legal recognition of DAOs, but it is still rather a work in progress.
These legal issues have also extended to the future of DeFi given that DAOs are major players in the ecosystem. Most DeFi applications have DAO-like governance systems, and the legal issues that may arise from these models could put off institutional investors and the general public.
These legal issues concerning DAOs are pertinent to the growth of the crypto industry and the ability to develop the decentralized technologies into the future of the financial system.
