DAO in Wyoming: US state shows us possible approach to DAO regulation
10 Dec 2022
Decentralized autonomous organizations, or DAOs, are one of the most interesting applications of blockchain technology. These are Internet-native organizations that have the potential to transform the way people do business and collaborate on projects. Thanks to Web3 connectivity and the power of smart contracts, DAOs make it easier for like-minded people to rally behind a shared cause and be active participants in the decision-making process. However, being a rather new form of collective, DAOs are facing some challenges that need to be addressed.
Arguably, the biggest challenge stems from the lack of regulation. Namely, DAOs are not considered legal entities, so in order to do business a DAO has to be tied to a traditional company. This seems like an unnecessary complication and limits the reach and flexibility of DAOs.
One approach to solving this issue can be found in the US state of Wyoming, which has passed a legislation that allows for a DAO to register as an equivalent of a limited liability company (LLC). Let’s take a closer look.
DAO in Wyoming
Wyoming Senate Bill 38, also known as the ‘Decentralized Autonomous Organizations Supplement’, was passed into law by the state Senate in April of last year. The legislation
Permits DAOs to register as LLCs under the Wyoming Limited Liability Company Act. Under this law DAOs have a proper legal status and their members enjoy liability protection. The Supplement outlines the registration requirements that DAOs must meet and the procedure they must follow in order to register. It also includes definitions for various aspects of DAOs, such as ‘smart contract’ and ‘majority of members’, and ‘member interest’.
Having DAO-specific legislation is a big deal, not only because it gives a proper legal status to DAOs, but also because it takes into account the intricacies of these organizations. In Wyoming’s case, the state lawmakers have clearly aimed to create a law that supports innovation in that space and not simply lump DAOs together with traditional LLCs. As an illustration of that, earlier this year Wyoming amended the Supplement to better reflect DAOs’ specific structure and the way these organizations operate.
The most significant change in the amended version concerns the so called majority of the members which sets the minimum threshold of DAO members that must participate in voting in order for a proposal to be passed. The previous version of the Supplement stated that a majority of the members meant over 50% of participating membership interests in a vote “for which a quorum of members is participating”. Worded this way, the law placed a strict requirement for quorum-based voting that would naturally become more difficult to uphold as DAO memberships grow.
To address this limitation, the new version of the law modifies the definition, stating that a majority of the members means more than 50% of the membership interest eligible to participate in a vote or “any membership interest required pursuant to [DAO’s] articles of organization or operating agreement”. That last part essentially gives DAOs the freedom to define how they establish quorum.
As presently constructed, the law recognizes that DAOs can be member-managed, algorithmically-managed by underlying smart contracts, or use a hybrid model where the management is handled by a combination of members and smart contracts. The Supplement stipulates that any smart contracts utilized by a DAO must be “capable of being updated, modified or otherwise upgraded”. The management model of a DAO must be specified in its articles of organization.
The articles of organization – which is a document that is required to establish a limited liability company in many US states – and the smart contracts govern all aspects of the DAO, including the procedures for dispute distribution and for updating and modifying the organization’s smart contracts. Where necessary, the articles of organization and the smart contracts may be supplemented by an operating agreement, which may be a smart contract.
How to register DAO in Wyoming
So, how does one register a DAO in Wyoming under the current law? Here are some of the most important details you need to know.
- You can apply for formation of a DAO either online or by mail.
- The articles of organization must also contain: a statement that the organization is a DAO; publicly available identifier for any smart contract that is directly used to manage, facilitate or operate the DAO.
- If such identifiers are absent, the DAO is given 30 calendar days from the day of the filing to provide the required information. A failure to do so in the specified timeframe would result in the dissolution of the DAO.
- The name of the organization must include wording that shows its status as a DAO, namely one of the following abbreviations – DAO LLC, DAO or LAO.
- You don’t need a Wyoming residence to register a DAO in the state, but you must have a Wyoming registered agent.
- An LLC can be converted into DAO by amending the articles of organization to include all the required information.
A step in the right direction
Wyoming’s efforts to legitimize DAOs as legal entities is a great example of how Web3 organizations can receive adequate support within the current legal and regulatory framework. It’s a step in the right direction, one that will hopefully prompt regulators around the world to take similar action.