The legal status of entities playing a significant role in the crypto asset market is to be studied in a highly topical probe by the Law Commission of England and Wales. In a call for evidence published today, the commission asks for evidence about how so-called decentralised autonomous organisations (DAOs), bodies set up and run online according to rules maintained on a cryptographic blockchain, should be characterised.

The announcement comes amid a crisis in global crypto markets following the $32bn collapse of Bahamas-based trader FTX. 

According to the Law Commission’s announcement, the legal status of DAOs is ambiguous. While DAOs are sometimes likened to existing legal forms, such as general partnerships or unincorporated associations, they often have several different characteristics and elements which might distinguish them from existing forms.

Some DAOs include a recognised legal form or incorporated entity, while many are involved with the development of code that is used to create so-called smart, or self-executing, contracts. Many DAOs also use smart contracts to automate or program some elements of their internal activity. 

Few DAOs appear to be structured using the law of England and Wales, the commission states. 'Huge amounts of value flow through, are created, used and sometimes lost by DAOs. This raises questions about their legal status, the liabilities of those who participate in them, and the rules and regulations that apply to them.'

Professor Sarah Green, law commissioner for commercial and common law, said: 'DAOs are said to offer multiple benefits to market participants, incentivising cooperation and innovation, levelling playing fields, reducing the scope for human error, lowering costs, and increasing transparency. Yet their legal and regulatory status is unclear.

'Our work will aim to build consensus on the best ways of describing the constituent elements of DAOs and to highlight ways in which the law of England and Wales might foster their development.'

The call for evidence is open until 25 January 2023 and will contribute towards a scoping report commissioned by the government.

 

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