Lack of Legal and Regulatory Clarity

Note: Data in this section last updated July 3rd, 2022

Given that DAOs have no physical location and don’t register as corporations, they often exist in a legal state of limbo.

This creates several potential risks, including:

• Tax Liability: While it’s clear that individuals receiving compensation from a DAO or selling governance token must pay taxes, what’s less clear is whether the DAO itself is a taxable entity. If so, who is responsible? Will members have to split the bill? Although unlikely, a worst-case scenario would find everyone holding a governance token liable for the tax burden.

• Personal Liability: One of the benefits of a traditional LLC is that it offers its partners protection from personal liability. For example, if an LLC goes bankrupt, creditors can only seize the assets of the business, and not the owner. DAOs do not currently offer the same level of protection, leaving members at risk. For example, what happens if someone sues a DAO, are the members liable?

• Inability to do Business: The legal uncertainty around DAOs brings up another concern – most traditional corporations can’t or won’t do business with a non-legal entity. This cuts of several lucrative options and potentially hurts the growth of the ecosystem.

Although we are making headway – both Wyoming and Vermont have allowed DAOs to incorporate as limited liabilities companies – we are still in the early days and the laws haven’t quite caught up yet.

One entity trying to bridge this gap is OpenLaw (now Tribute Labs), who provides legal “wrappers” for smart contracts and helps DAOs register as legal entities. The platform’s most famous project – The LAO – registered as a Delaware LLC in 2020 and complies with the applicable regulations for an investment firm (including KYC and accreditation requirements for its members).