How does the proposed Lummis-Gillibrand Bill affect DAOs?
The Law (aka The LummyGilly)
(The LummyGilly nickname will never catch on, but I think it sounds like a cool dribble move or something. Much more exciting than whatever people are calling it now.)
When the senators wrote this bill, DAOs were not at the top of their minds. Out of 69 pages of writing, they devoted a 1/2 page to DAOs. There are many possible explanations for this, yet, a few come to mind;
- DAOs are relatively new
- DAOs haven’t done much harm to retail investors or the average American
- While they are growing fast, DAOs haven’t reached the same popularity as other crypto instruments, such as NFTs.
It is clear that DAOs are not the primary focus of this proposed crypto regulation compared to other topics.
Is a lack of extensive DAO regulation a good or bad thing?
Intuition leads one to think that this development is a good thing. Logically, that makes sense, less regulation → less scrutiny → more freedom → more prosperity? However, one can contend that this logic is not pertinent to DAOs. Why is that? Why would more regulation surrounding DAOs be a good thing?
Before this proposed bill, the US Federal government has shown no impetus to regulate DAOs at the federal level. This creates a grey area, with DAOs left wondering how to operate in a corporate landscape bound tight with regulation. Many DAOs wish to set up bank accounts, own real estate, and enter into contracts as any commonly incorporated entity would. In response, States like Wyoming, Tennessee, and Vermont have passed laws regarding DAO incorporation. While these laws are positive developments for DAOs looking to incorporate in the US, DAOs are now forced into a balancing act and left wondering if the State regulations in the jurisdiction in which they are incorporated will be overruled by federal legislation. This lack of clarity currently faced by DAOs in America led several sovereign nations to create their own innovative laws concerning DAO incorporation, as is the case for the Marshall Islands.
In my opinion, new legislation, whether it’s by the US States or sovereign countries, is a net benefit for the DAO community. Specifically, more lucid legislation surrounding legal entities provides DAOs guidelines to obtain corporate personhood while providing limited liability for their members. But why do DAOs need centralized federal governmental clarity on regulation? Doesn’t this go completely against a decentralized ethos? NO! DAOs are unique to crypto in that they rely almost entirely on governance. They are arguably more dependent on “laws and restrictions” than any other aspect of the industry, so dealing with a lack of federal guidance is challenging. These decentralized organizations are trying to incorporate aspects of laws and regulations into their smart contracts to run their organizations. As one can imagine, defining predetermined governance or creating a constitution of rights is extremely difficult. With a lack of clarity from federal laws, DAOs face the battle of anticipating regulation to ensure their constitution allows them to react accordingly. So, while DeFi focuses on how the government will define a security, DAOs cannot even operate effectively in the corporate arena without acute governmental guidance. The clearer the federal laws, the easier DAOs can create their organization’s rules to accommodate them, making their DAO more effective in the real world.
Despite the lack of scope or depth regarding DAOs in the LummyGilly, it was still an overwhelmingly positive outcome for the DAO community. DAOs may finally be receiving guidelines and regulations to help them create their organizations. What are these welcomed guidelines? More specifically, how will the government recognize these DAOs incorporated as legal entities domestically and abroad?
Definition of a DAO according to Lummis and Gillibrand:
The term ‘decentralized autonomous organization’ means an organization—which utilizes smart contracts to effectuate collective action for a business, commercial, charitable, or similar entity, governance of which is achieved primarily on a distributed basis, and which is properly incorporated or organized under the laws of a State or foreign jurisdiction as a decentralized autonomous organization, cooperative, foundation or any similar entity.
The language here is notable: “Properly incorporated or organized under the laws of a State or foreign jurisdiction.” One could interpret this line as; in the US, to be recognized as a DAO, you must be incorporated in some way. The law doesn’t provide specific guidance for what a DAO should do after incorporating, but a requirement to establish some form of legal entity aligns with what a few DAOs are doing now anyway. The next logical question: since incorporation is required as per the quoted section, how will this law pertain to DAOs which are not incorporated? The majority of DAOs are not incorporated, for better or worse. Still, a valid interpretation of this law is: that to be defined as a “DAO” in the view of the US federal government; a DAO must incorporate. One could deduce if DAOs are not incorporated, then they are just to be treated as they are now in the eyes of the law: groups of people in a common enterprise, or a general partnership. As a general partnership, DAOs risk exposing their members to unlimited liability. Unlimited liability means if a DAO were to enter a lawsuit, each member of the DAO could be held liable for the actions of the DAO in the eyes of the law. More details regarding liability may arrive in a future LummyGilly draft; otherwise, courts will set precedents when DAOs are involved in court cases. While useful, legal precedents are reactionary and interpretive in nature. Today, a DAO has no certainty about how a judge will define their organization in the future; this looming uncertainty poses risks to their organization.
Where does MIDAO fit in?
To start, MIDAO has already been doing what this section of this bill proposes for DAOs. MIDAO helps DAOs incorporate in the Marshall Islands as a non-profit DAO LLC. Does this type of corporate structure fit with the LummyGilly language?
- properly incorporated or organized under the laws
- of a foreign jurisdiction
- as a similar entity (in this case, an LLC)
Yes. As one can see, the MIDAO non-profit DAO LLC follows all the parameters defined by this section of the proposed bill. This proposed bill doesn’t say anything about what a DAO must do once it incorporates; it just provides a definition for a DAO. It will be interesting to see if future drafts actually provide guidance or directions for DAOs.
What now?
It might be prudent to discuss with your counsel to understand the implications of the proposed bill. One such implication could be that there weren’t enough implications. There may be many more regulations and bills following this one, so it’s crucial to be prepared. It is MIDAO’s opinion that it is prudent to incorporate your DAO sooner rather than later. While this is only a proposed bill, it is clear that, if passed, incorporation will be required to be defined as DAO. Despite this requirement, the lack of additional regulation regarding DAOs in this bill seems to imply a Laissez-faire tone.
It appears, from the lack of DAO coverage in this bill, the US government might welcome States and nations helping DAOs incorporate to create their own in-depth regulations.
From the perspective of the US federal legislature, perhaps that makes sense. Why try to understand and regulate an industry that still has so much to learn to understand itself? The LummyGilly lets States and other jurisdictions deal with the complex project of regulating DAOs while DAOs continue to evolve, grow, and adapt.
Therefore, while the law leaves much to be desired in its section on DAOs, most DAOs will still benefit from these interpretable guidelines, so long as States and international jurisdictions continue to accommodate their needs. Once again, MIDAO suggests obtaining your own counsel to help digest what this bill means for your DAO sooner rather than later. Also, feel free to contact anyone at MIDAO if you have any questions. Keep in mind that this bill is proposed, not passed. While it may be helpful to get ahead of the curve, there is a real chance this bill may change or not pass at all. The reality is that everyone in this space is learning as we go, and the US government, for better or worse, is focusing less on DAOs for the time being.
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