DAO builders are building for the utility of digital public goods, security, privacy, composability, and portability. Despite the volatility in price of tokens, the (arguably more important) values being upheld by builders will continue to be relevant in an increasingly digital world. To put it simply, individuals are craving a simple environment to build and contribute to things that make our lives better through more transparent and secure use of technology.

It’s almost 6 months since LawFi DAO came into existence.

Existence is exactly what we’ve spent most of our time thinking and talking about. How does a DAO really come into existence? At what point does it become or cease to be decentralised, autonomous and an organisation? And what are the incentives and/or purpose/s that allow it to maintain not just its existence but its relevance?

These are questions not only applicable to new organisations that come into existence purely digitally, such as through the minting and distribution of a token, but also to existing centralised organisations that either seek to involve a broader stakeholder base in their strategic and governance decisions or are facing pressure for more transparency from the broader stakeholder base. Can you demerge a DAO from an existing organisation? Currently for legal and tax purposes, no.

Look at the twitter poll that Elon Musk just ran with users – a ‘yes’ or ‘no’ vote on whether he should step down as head of twitter following his release of a policy prohibiting linking to competitor social media sites. Typically, this sort of decision would be made by the board of directors, with influence from shareholders, powerful (enough) factions of management and other external interests. More than one million votes were cast in just under 15 minutes. After about an hour, Elon announced that going forward, a poll would be taken before future strategic decisions are taken.

Regulators are asking: Why can’t a DAO be contained to existing legal entity types and the legal frameworks that apply to those entities?

In theory, decentralisation of governance is occurring at twitter and within the ‘legal entity’ of twitter for the platform to maintain its relevance and thus existence with its users. The same users who are increasingly appreciating their power to influence the utility they get from the ‘digital good’ that is twitter, in addition to expectations around privacy, security, data ownership and portability. But what if more day-to-day decisions start going to twitter poll from the CEO? Would those that vote yes, or no be liable in the same way that Ooki DAO members that voted on proposals are the subject of proposed liability in the CFTC complaint?

Policymakers are considering ‘why not’ to recognise DAOs as a new form of ‘thing’ and the basis to recognise and/or regulate them. They are considering whether to approach DAOs:

• as things that can be given thin legal recognition for our interactions with them (so we can treat them as a counterparty with legal personality),

• if they should be an entity that is regulated in a similar way to corporations with directors’ duties, disclosure, and reporting obligations, and

• how their activities (such as token distribution and staking arrangements) should be regulated.

Most want to create the ‘DAO regime’ that attracts all DAOs to register in their jurisdiction with a head office and workforce in the same way that multinational corporations can be attracted to one jurisdiction or another. This ignores the features of digital-first organisations such as DAOs which support decentralised decision making and remote workforces, autonomy and self-sovereignty, and the freedom to be a digital nomad.

The fundamental question remains: Why are DAOs important? Particularly unwrapped DAOs?

Over the centuries the corporate structure has become widespread and has allowed multinational enterprises to do trade and commerce across borders. However, the corporation and existing legal frameworks are suffering because they are not natively transparent nor natively international or transnational (nor are government administrations). The compliance costs to maintain ‘trust’ (what Davidson, Novak and Potts coin as ‘cost-of-trust’) in opaque government and corporate structures is estimated to be ~35% or US$29 trillion. With rising cost pressures in the global economy, the transparency and real time compliance that autonomously governed organisations can offer may be one key part of reclaiming costs that can otherwise be spent more productively. In addition, despite increased use of ‘legal wrappers’ for DAOs it is still unclear to what extent a DAO can exist inside or separate to its ‘legal wrapper’. The question is: what is the legal and tax status of an autonomous open-source protocol that functions (such as the wrapped ether contract) where no admin or controller keys remain? Is it no longer a DAO because there are only users of the protocol and no active human governance?

The questions will no doubt continue, so what is the place of LawFi DAO in offering guidance or support? In accordance with its purposes, LawFi DAO’s efforts are set out below.

LawFi DAO activities from 1 July 2022 to 20 December 2022

Governance and establishment

1. On 1 July 2022, a few of us agreed to be bound by the LawFi DAO Rules. The LawFi DAO Rules were based on the model rules for an unincorporated association provided by Consumer Affairs Victoria and are written in plain language. This allowed us to start our organisation as one more familiar to regulators and policy makers and more clearly demonstrate the steps to operate as a ‘digitally native’ global organisation. A version of our rules will always be in plain language; however, our experiments will seek to progressively automate our governance and operational activities so that the LawFi DAO Rules do not have to be interpreted and applied but instead form the digital framework for interactions within and by LawFi DAO. Ideally, we will seek to complete the initial automation effort in a 2-year timeframe.

2. Several weeks of workshops held for the Establishment working group to discuss legal and tax considerations of various possible DAO structures and wrappers. We could have started as a cooperative, a trust, a partnership or one or more corporate entities or a combination of the above across Australia and other jurisdictions. All discussions were recorded and are available on our YouTube channel. This is an incredible open-source resource for anyone that wants to deep dive an upskill around the Australian legal and tax considerations when forming and operating as a DAO.

3. First draft white paper prepared and discussed with the LawFi DAO community in September 2022; second draft published for discussion in November 2022. Available on our website.

4. First general meeting of members in November 2022 to vote on four special resolutions: 2 were passed; 2 were not. Those resolutions that were not passed were the result of people abstaining to vote rather than voting no, indicating that more information and education was required before feeling comfortable to vote yes or no on a) to approve the draft white paper; and b) to register to incorporate the association with Consumer Affairs Victoria (and afford the association legal recognition in its own right - rather than in the names of its officers - and limited liability). POAPs sent to attendees to commemorate participation in the first general meeting.

5. Membership token is being deployed and the website upgraded to interact with web3. Thank you to member Roy Hui from Pellar Technology for all assistance.

6. Snapshot voting page established for future votes of members, capable of facilitating votes whether a token exists.

   Communications

7. Website established, LinkedIn and Twitter pages and YouTube channel created.

8. First community call in August 2022. POAPs sent to attendees to commemorate participation in the launch. Thank you to Bibi Barba and Vic Wells for the gorgeous artwork.

9. LawFi DAO discord server established; Console demo completed and LawFi DAO console recently established (a web3 native alternative to discord). One of the first votes to occur once our membership token is deployed will be a proposal to move from discord to Console.

   Treasury, financial and tax information

10. Multi signature wallet deployed to hold ENS name (lawfidao.eth) and to receive membership fees paid in ETH and USDC.

11. Application for bank account denied based on DAO structure – bank does not have sufficient risk processes to support banking services for a DAO.

12. Application to open account with centralised token exchange ongoing.

13. Bank account created in the name of Joni Pirovich, segmented from other personal and business accounts, as one of the officers of LawFi DAO.

14. Application for an Australian Business Number (ABN) denied initially; on reapplication ABN granted. Complaint made to ATO regarding entitlement to ABN and decision made without an answer to the grounds of complaint.

15. Registered office service engaged for privacy of officers’ addresses and to receive official mail.

16. Quotes requested for support in Australian tax filing preparation and lodgment.

17. Application for association liability insurance submitted, awaiting response from broker and insurers.

Policy and education

1. Submission to UK Law Commission on digital assets consultation lodged, following a few months of weekly workshops with members and friends to discuss the consultation paper and recommendations.

2. Assistance to the Australian Board of Taxation in their review of the tax treatment of digital assets by providing a copy of the draft LawFi DAO white paper and submissions

3. Expressed interest for LawFi DAO to participate in UK Law Commission Calls for Evidence on DAOs and Digital assets which law which court (Conflict of Laws).

4. Assistance to Australian Law Reform Commission regarding education about DAOs and recommendations around reform of the Corporations Act (and financial services regulation) related to emerging technologies following release of their FSL7 paper.

5. Guest lecture about DAOs at Swinburne University of Technology to students of the Applied Financial Services Project within the Master of Financial Technologies course.

6. BFF discord and twitter spaces to educate the BFF community about DAOs, thanks to connection through member Liya Dashkina.

7. Education session to the Australian Securities and Investments Commission regarding the options for the LawFi DAO protocol starting from basic pay-to-rely functions to peer review, insurance pool and a revenue or grant distribution pool and the ensuring legal complexities and uncertainties. Visit the #establishment channel of our discord server for more information.

8. Guest panelist at the Blockchain 4 Europe Summit in Brussels discussing ‘Why DAOs are a key building block for the future economy’ with Dr Joachim Schwerin, principal economist at the European Commission, Balazs Nemethi of kycDAO and Manuel Muller, strategy advisor at capneo DAO.

9. Guest speaker at the RMIT ‘What’s governing web3’ conference to provide commentary on the implementation in Australia of the COALA DAO Model Law, including participation in DAO governance workshops spanning game theory, ethnography, constitutional design.

10. Initial liaison with Consumer Affairs Victoria around the process for registering to incorporate an association, describing some of the difficulties around the not-for-profit exemptions in State law versus s 115 of the Corporations Act. Visit the #establishment channel of our discord server for more information.

    What’s ahead for 2023?

11. Digital design workshops scheduled for February 2023, led by member, Andrew Walton from Multilateral Group (Australia) Pty Ltd, and subject to the outcomes of those workshops and funding the following experiments may proceed.

12. Experimentation with LawFi DAO operating as an ‘accredited authority’ for DAOs seeking accreditation under the COALA DAO Model Law, to assist governments with understanding how such a model could be legislated.

13. Experimentation with DAOstar One to adopt and input to the interoperable standards.

14. Experimentation with ‘Know Your DAO’ processes to support risk-based and fit for purpose onboarding and support of DAOs by service providers (both centralised and decentralised).

15. Collaboration with Verida around their DID (decentralised identity) and Vault solution for managing verifiable credentials.

16. Experiment with kycDAO and KYC NFTs.

17. Participation in the ongoing policy consultations of the UK Law Commission, Australian Law Reform Commission, the OECD et al.

18. More speaking and panelist engagements, including the ACTL-CPT Talk on taxation of DAOs held out of Amsterdam by Dennis Post and Anna Vvedenskaya.

    Creator Spirit awards

    The first inaugural Creator Spirit recognition awards for 2022 have come about as a community tradition I’d like to instill and perpetuate to encourage members and friends to aspire to this special category of contribution and recognition. The awards are intended to recognise members and friends that have shown consistent dedication and support of the LawFi DAO purposes while demonstrating respect, reciprocity, kindness, and integrity while doing things differently and appreciating that time is our most precious resource.

    The 2022 awards go to (in alphabetical order):

    Andrew Walton, Arturo Rodriguez, Dimitrios Salampasis, Electra Frost, Ellie Rennie, Gordon Christian, Greg Metzmacher, Greg Oakford, Liya Dashkina, Michael Bacina, Myles McGregor-Lowndes, Roy Hui, Susannah Wilkinson, Victoria Wells.

    Thank you to all the members and friends that have joined or supported LawFi DAO in one way or another. Please take some time to rest and reflect over the next little while, enjoy playing and learning about the technology and the nuanced models of governance and participation that it heralds.

    Your Creator Spirit, Joni Pirovich

    A word from one of our members: Liya Dashkina

    “For me joining LawFi DAO was all about experimentation. As a non-lawyer, I was curious to join an organisation whose objective (among others) was to provide guidance, pave the way and lift the complex legal veil for other web3 startups. Over the last six months, I’ve had an incredible opportunity to observe the complexities of navigating the legal intricacies as an aspiring blockchain-based decentralised organisation. For a DAO entity that does not fit into the traditional legal framework, the importance of marking the legal boundaries has never been higher. The conversations being had today with the regulators and other government bodies, both in Australia and internationally, will likely help to shape the legal treatment of DAO structures for many years to come. I am excited to be a part of this exploratory journey!”

    Author: Joni Pirovich, as authorised representative of LawFi DAO member Blockchain & Digital Assets Pty Ltd. With thanks to Liya Dashkina for reviewing and providing a quote from her perspective as a member.

    Acknowledgement: We acknowledge the Traditional Custodians of the lands we live and work on. We pay our respects to all Elders, past, present and emerging, of all First Nations peoples.

    Content License: This work has been produced by Joni Pirovich as authorised representative of LawFi DAO member, Blockchain & Digital Assets Pty Ltd. All rights are reserved by that member in respect of this work, and that member provides LawFi DAO, currently an unincorporated association formed in Victoria, Australia, with a non-exclusive, royalty free license to use this work for the following purposes:

    a) to read and discuss for educational purposes.

    b) to copy and redistribute the work for educational purposes as long as appropriate attribution is made to the author and LawFi DAO and indications are clear about any changes made.

    c) to receive a portion of fees from collectors as donations to LawFi DAO in furtherance of its not-for-profit purposes.

    Other persons and DAOs (to the extent DAOs are not recognised as persons) are granted a non-exclusive, royalty free license to use this work for the same purposes as LawFi DAO stated above.

    Artwork License: With thanks to my 4-year-old son Leo for providing the artwork to accompany this blog post. All rights are reserved by him with respect to his artwork.

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    Collecting: By collecting this blog you will be promoted to pay the collection fee which is inclusive of Australian Goods and Services Tax (GST) if you are an Australian resident or GST-free if you are a non-Australian resident. All proceeds net of costs to Blockchain & Digital Assets Pty Ltd will be sent to lawfidao.eth treasury wallet. A tax invoice and receipt can be provided to you upon request to jp@lawfidao.com. Each collectible blog is deployed on Optimism, an Ethereum Layer 2 network. No royalty has been set for secondary sales of blog pieces so secondary sales are treated as a commercial exchange between the NFT holder and purchaser where the NFT holder is responsible for the legal and tax implications of resale. However, LawFi DAO and Blockchain & Digital Assets Pty Ltd reserve all rights to set a royalty on secondary sales.

    Disclaimer: If you subscribe to the LawFi DAO blog, or pay to collect blog pieces, all amounts received into the LawFi DAO Treasury wallet from subscriptions or collection fees will be treated as donations. The amounts received into the badasl.eth wallet will be treated as assessable income and go towards defraying the costs of preparing and minting the blog. At the date of posting this blog, LawFi DAO is a not-for-profit unincorporated association of persons, but it is not a charity registered with the Australian Charities and Not-for-profits Commission and nor does it hold income tax exempt or deductible gift recipient status. You are responsible for seeking independent and professional legal and tax advice regarding your eligibility to subscribe to or collect from the LawFi DAO blog. None of the content constitutes legal, tax, financial or security advice.