Countries that welcome DAO’s

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The DAO (decentralized autonomous organization) economy has garnered serious interest from authorities at the state and regional levels for the last few years. However, the reactions vary. While major economies look somewhat reluctant to legalize DAOs for one reason or another, a group of relatively small countries shows enthusiasm to probably gain an early-mover advantage in the game. Let's take a look at how different jurisdictions are dealing with these structures that can one day take the ongoing blockchain craze to another level.

1 - Wyoming, U.S.A

Wyoming is not the first state in the U.S. coming to mind when you think of high tech and finance industries. But the Cowboy State is determined to become the "blockchain state."

The authorities in Wyoming took a big step recently to introduce a regulatory framework for DAOs. The bill they passed allows DAOs to incorporate in the state and be founded as limited liability companies (LLCs). This bill cleared some of the doubts regarding the legal responsibility in DAOs by turning them into a legal entity.

The legislation brought structure to an expanding business segment. Yet, it stopped short of giving DAOs a carte blanche. The Secretary of the State of Wyoming retains the right to strip a DAO of its liability protection if it is involved in some kind of illegal activity.

2 - Malta

The tiny Mediterranean island looks to diversify its economy, which is mainly dependent on tourism revenue. Becoming a crypto-friendly country is one of the steps to realize that goal.

In accordance with this goal, the University of Malta has already introduced a master's program on blockchain and distributed ledger technology (DLT). Malta also became the first country to legalize DAOs. The legislation introduced some form of corporate governance into DAOs. But it ended up placing too much responsibility on the executives of these organizations, which is incompatible with the spirit of DAOs.

In 2018, Delta Summit, the first government-backed event on crypto-banking, was held in Malta. Such enthusiastic initiatives did not amount to much at the end of the day, though. There are still concerns that cryptocurrencies could undermine anti-money laundering efforts, has slowed things down a little bit. Today, any DAO willing to conduct business in Malta should have a license, incorporate a limited liability company, and employ at least three employees.

3 - Switzerland

California may have Silicon Valley, but it is the small Canton of Zug in Switzerland that's determined to become the Crypto Valley. Zug is a small town with a business-friendly environment and low corporate tax rate. Yet, it still has difficulty attracting venture capitalists. The town hopes to grow a blockchain ecosystem to compensate for the lack of investment.

The fact that Ethereum Foundation is based in Zug came to define the town in the last several years. Today Zug is home to many crypto companies like Monetas, Bitcoin Suisse, Xapo, ShapeShift, ConsenSys, and Tezos. Local authorities seem eager to get on with the times, too. As of the last quarter of 2021, Zug Department of Finance accepts tax payments in cryptocurrencies. The town also successfully ran a test of blockchain-based municipal voting in 2018.

Switzerland might be the best-positioned country to become the center of the crypto industry. It is home to some of the best financial institutions in the world. The fact that it has a population with a high disposable income per capita can be a boon for startups, too. It is no surprise that the country wants to have a say in the future of money.

However, the very success the Swiss have had in traditional finance practices may come back to haunt them when it comes to DAOs. The Swiss National Bank seems to be concerned that cryptocurrencies may increase volatility in the market. As smart contracts reduce friction in transactions, people will find it easier to complete transactions. Authorities fear that a sharp increase in the number of transactions will disrupt the finance sector.

The Swiss are playing a balancing game here. On the one hand, they are trying to attract crypto firms. On the other, they are doing their due diligence, taking as long as one year to issue crypto licenses. It will be quite an achievement if they manage to preserve their impeccable reputation for old money while leading the move toward an economy built around digital assets.

4 - Estonia

Another small European country that is trying to make a name for itself as digital-friendly is Estonia. The Baltic country introduced a crypto licensing plan in 2019 to attract crypto companies and give its economy a much-needed boost.

However, it did not take long before the Estonian government hit the brakes. Similar to what happened in Malta, Estonian authorities recognized the concerns over money laundering and shut down hundreds of crypto businesses recently. This move brought down their number from 1,234 at the end 2020 to 353 by the end of August 2021. Still, no other EU country seems as favorable to crypto businesses as Estonia today.

More: https://www.e-resident.gov.ee/blog/posts/daos-in-estonia/ (Below)

5 - Gibraltar

There seems to be a race among tiny states, cantons, or territories to be the crypto darling. Gibraltar, a British overseas territory, is in the hunt, too.

The administration in Gibraltar has for some time sought ways to make government services more efficient and effective. It has decided recently to integrate blockchain into its legacy systems. RSK, the smart contract platform that underpins Bitcoin, has become the platform of choice.

The Government of Gibraltar hopes that this change will enable its citizens to store their personal documents on a decentralized ledger. This will facilitate access to documents like IDs, driving licenses, or vehicle registration papers. The government has also given crypto licenses to 15 firms.

Conclusion

This by no means is an exhaustive list of countries showing interest in DAOs, cryptocurrencies, and blockchain technology in general. Countries like Iran and China had either cracked down on cryptocurrency transactions or outlawed them altogether in the past. Today, they seem to have come around to the idea. They are rumored to be mulling over plans to introduce their own state-owned cryptocurrencies.

It looks like governments and institutions like the European Union recognize the potential of blockchain technology. But they all have their reasons to remain hesitant:

  • Repressive regimes wouldn't like it if their subjects conducted business, organized or financed political activism through DAOs. DAO participants want to evade the control of a central authority. Repressive regimes will do anything to stop that.
  • The more liberal countries fear that DAOs and cryptocurrencies can spiral out of their control down the road. These technologies can be used to sidestep sanctions imposed on countries like Iran and North Korea. Worse still, they can make activities like money laundering or financing of terrorism almost impossible to detect.

Nevertheless, blockchain has become too big to ignore. Everybody is keeping an eye on attempts to legalize DAOs in different countries. As governments learn from these experiments, they will look to harness the power of blockchain for their own interests.

Decentralised Autonomous Organisations / DAOs in estonia

Priit Lätt • Nov 01, 2022 • 9 min read

Setting up a legally sound decentralised autonomous organisation (DAO) in Estonia – doable or mission impossible?

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This guest post about DAOs in Estonia is contributed by Priit Lätt, Partner at PricewaterhouseCoopers Legal in Estonia. PwC Legal is part of PwC's international network, providing legal services, and connecting clients with tax, financial and accounting experts from all over the world.

A decentralised autonomous organisation (DAO) is a new kind of governance model for web3 businesses. It is typically understood as a community of individuals that leverage distributed ledger technology (DLT) solutions. Their aim is generally to decentralise the governance of an application or an asset (a software protocol) to eliminate human involvement (error, inaction or fraud). A DAO is a totally new kind of organisation – a self-governing body operating on democratic principles that is not influenced by outside forces.

This article considers the possibility of setting up DAOs in Estonia using existing legal vehicles.

1. Rise of DAOs

Before jumping into practicalities, let's briefly consider some real world examples of decentralised projects using a DAO governance model.

According to DeepDAO, a DAO stats platform, DAO treasuries experienced more than 40x value growth in 2021. At the time of publishing this article (1 November 2022), the DAO treasury was $11.2 billion.

One of the great examples of DAO use cases is MakerDAO, which aims to provide a decentralised stablecoin called DAI pegged to the US dollar in a 1:1 relation. Think of this DAO as the largest central bank for the decentralised finance world bringing real world assets on-chain.

In Estonia, several startups have publicly announced plans to use a DAO structure. For example, the Summer of 2022 saw a spin-off transaction, unique in Estonia and on a global scale. The blockchain-based enterprise Solid World DAO grew out of eAgronom, an Estonian startup, which is developing a carbon trading program. Solid World DAO aims to simplify the trading of carbon credits and make the market safer and more attractive by operating through a decentralised autonomous organisation. Solid World DAO is building the world's first public good infrastructure for pre-purchased but not yet certified carbon credits. This will increase investment in carbon credit projects and in turn helps to stop climate change. As a first step towards its launch of a software protocol and full decentralisation, Solid World DAO chose to establish itself in the legal form of an Estonian non-profit association.

In mid-August, the Estonian commercial register also incorporated INO MTÜ. It aims to be the first internet native organisation utilising the non-profit association legal form in order to reduce legal risks and test the suitability of Estonia's legal framework to create and manage DAOs efficiently. Of course, both projects are using Estonia's advanced digital infrastructure.

2. What are the legal challenges for DAOs in Estonia?

There is currently no general legal framework for DAOs at the global, EU or Estonian levels. The only exception is in the US State of Wyoming. There, the Limited Liability Company Act “Wyoming Decentralized Autonomous Organization Supplement“ has been in force since 1 July 2021. It applies the Wyoming Limited Liability Company Act to DAOs so they can have legal status as limited liability companies.

On a positive note, there has been some policy movement closer to home. At the EU level, one of the last draft versions from April 2022 of the Markets in Crypto Assets Regulation (MiCA) included a definition of a DAO. It stated that “a ‘decentralised autonomous organisation’ means a rule-based organisational system that is not controlled by any central authority and whose rules are entirely routed in its algorithm”. However, the final text of MiCA does not include this definition or any reference to DAOs.

The lack of general legal framework for DAOs creates uncertainty regarding the liability of the parties involved in the decentralised project. Yes, DAOs rely on lex cryptographica, the only governing law is the protocol or smart contract. Code is law. However, these statements do not mean that DAOs as well as its „members“ are immune to traditional legal norms. Despite the virtual nature of DAOs, the initiators, builders, developers and participants are human, thus triggering a need to safeguard their rights and interests.

The biggest legal challenges or issues DAOs face are:

(a) Lack of global recognition (or determination of applicable law)

Because DAOs do not operate in any given jurisdiction, regulators, courts or users may face challenges applying their national laws. As opposed to traditional software applications, located at a particular server under the control of an operator located in a specific jurisdiction, DAOs run on every node of a blockchain (ie, both everywhere and nowhere). The traditional theories to determine the jurisdiction for companies in most jurisdictions are linked either to the place of incorporation or the headquarters. In the case of a DAO, this is not really helpful, because in most cases both of these places cannot be determined.

(b) Lack of personality (or corporate status)

There is no legal entity which makes it difficult to create accountability in the traditional legal sense. Even if a regulator, court or user had jurisdiction over a DAO, there is a question whether the regulator, court, or user has the authority to impose rules on such a DAO.

(c) No incorporation = unlimited liability

Any member - literally anyone who has ever voted on a governance proposal - can be held fully liable.

These issues can expose members of a DAO to joint and several legal and tax liabilities under a number of jurisdictions.

3. How to set up DAOs in Estonia from a legal point of view?

Basically, there are two different options for setting up a legal structure of a DAO:

DAOs without a registered legal entity

This option is used a lot throughout the decentralised ecosystem in order to create a fully or true decentralised structure. This kind of DAO is neither a natural person nor a legal person (since this organisation is not recognised as a legal person by a legislator). In many jurisdictions (including Estonia), this structure could be classified as a partnership (in Estonia seltsing; in Austria Gesellschaften bürgerlichen Rechts; in Germany Gesellschaft; in France societe civile) under civil law.

According to Estonia's Law of Obligations Act, „In a contract of partnership, two or more persons (partners) undertake to act to achieve a mutual objective and to help to achieve the objective in the manner established by the contract, above all by making contributions.“ In Estonia, a partnership does not have a legal capacity, it cannot effectively enter into contracts and it cannot sue and be sued. In addition, all the members would have direct and unlimited liability for the partnership’s obligations, irrespective of the member’s personal contribution in the DAO. This is the most significant issue and risk. Thus, a DAO without a legal entity (i.e., a partnership) triggers several major legal issues.

DAOs with a registered legal entity

The option of using a full liability wrapper seems to be the best option for DAOs looking for the most legal certainty and safety. Of course, the quid pro quo is that they must comply with all the necessary regulations and give up some kind of decentralisation.

The most suitable legal vehicles to manage DAOs in Estonia are the private limited company (in Estonian, Osaühing or ) or the non-profit association (in Estonian, mittetulundusühing or MTÜ). The 2020 amendments to the Estonian law extended digital possibilities of adoption of resolutions of shareholders and members of all legal entities. It is possible to carry out fully virtual general meetings and members of the management board are not required to attend the meetings. In addition, shareholders and members of all legal entities are entitled to adopt of resolutions without calling general meetings. Thus, conducting voting in discussion channels such as Discord is actually possible.

For foreign entrepreneurs looking for a jurisdiction to manage their DAO with a registered legal entity, e-⁠Residency makes it possible (and easy). E-⁠residents can incorporate and run their legal entities in Estonia all online, without ever needing to travel here.

Now, let’s assume that the builders or founders are willing to give up some decentralisation (at least at the initial stage), designate trusted representative(s), and intend to achieve some non-profit purpose(s). These DAOs could use a non-profit association as their legal wrapper. Currently in Estonia, the formal requirements for setting up and managing non-profit organisations are (most) favorable for many DAOs. The primary functionality of these DAOs' protocols is not to make a profit, but to create and vote on governance proposals. The non-profit entity would control the smart contracts underlying the DAO's protocol and direct the actions of the DAO treasury to foster the development and growth of a decentralised ecosystem. This indicates to the non-profit nature of the organisation.

Final words on DAOs in Estonia

“The future is digital.”

So stated Valdis Dombrovskis, the European Commission's Executive Vice-President, at the Tallinn Digital Summit in 2021.

This digital future is already here, and it is decentralised and operated by autonomous communities. For proper functioning and in order to realise full potential of these decentralised communities and projects, legal clarity is needed for DAOs.

In the meantime, existing legal vehicles under Estonian law – private limited companies and non-profit associations - combined with e-⁠Residency digital solutions, makes it possible to minimise legal exposure of decentralised projects.

If you are interested in learning more about setting up a DAO in Estonia, contact the author via the link below:

Priit Lätt

Attorney-at-Law Priit Lätt is a Partner at PwC Legal Eesti responsible for the fields of IP/IT, tax disputes and public procurement at PwC Legal in Estonia.

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