When the United States Unlocks Internet Impact...
Regulatory clarity for DAOs will benefit American society.
Because internet-based organizations (commonly called “DAOs”) don’t fit into the regulatory guidelines of a corporation, 501(c)3, or any other structure which was defined before the internet, DAO pioneers face a number of risks that prevent more people from using this technology to advance their cause.
With purposeful regulation, the federal government can bring legitimacy to this internet-native organizational structure and unlock tremendous good for American society.
In this article you will learn:
Why DAO?
What do you do with a DAO?
The risks of trying to do good through a DAO.
Let’s dig in!
Why DAO?
Perhaps the simplest way to describe a DAO is a bank account managed by an online chat group. Combining the internet with digital assets opens up an entirely new realm of possibilities for coordinating people around a common mission.
Americans are electing to form a DAO rather than make use of an existing U.S. legal entity structure for many reasons, including:
Digital native: For people who have grown up with the internet, it feels as natural to form an organization on the internet as one in a state-based legal jurisdiction.
Efficient: DAOs remove the friction of establishing a state-based legal entity. They leverage the internet to spread information quickly. People with a common mission can begin pooling their resources into a DAO in a matter of minutes.
International: People in any country with an open internet connection can contribute to a DAO. U.S.-based entities will find it increasingly difficult to compete with the broad expertise harnessed by DAOs made up of contributors domiciled in countries all over the world.
Transparent: All actions involving digital assets on a public blockchain can be independently verified.
What do you do with a DAO?
Many DAO leaders are advancing a cause that is not commercial, providing us with early glimpses of how this technology can be used for social good.
Examples of DAOs working to make an impact include:
Cultural property: The fans of a sports team can combine their digital assets to buy the team so that the owner doesn’t sell it to a different city.
Data property rights: A social media app is forming a DAO so that app users can collectively govern what the company can do with their data.
Dissemination: A community of organizational scientists, strategists, and researchers are building the world's first decentralized, community-reviewed publication for the social sciences.
Global philanthropy: A group of American donors can use a DAO to decide how to disburse funding to grantees all over the world.
Historic preservation: A historical society’s members can contribute digital assets to a DAO for the purpose of renovating a historical building which has fallen out of line with municipal code and is at risk of being closed or demolished.
Immediate mission: A DAO was created to provide direct aid in the form of digital assets to the Ukrainian government as the Russian invasion began.
Intellectual property: A group of teachers in a DAO can share curricula and other educational resources with each other and distribute any revenue generated from their collective value creation.
Land conservation: A group of people can pool their digital assets to conserve wilderness and protect it from commercial development.
Long-term mission: Endowments and trusts can be composed of digital assets and be digitally governed by a rotating cadre of contributors to the DAO’s treasury.
Political engagement: Advocates for a cause or a candidate can pool their digital assets to influence electoral politics.
Professional guild: A group of software engineers formed a DAO to govern the collective value of their professional network and expertise.
Public goods: A group of citizens can pool digital assets to purchase a first edition United States Constitution in order to guarantee public access to the document forever.
Research: A biotech DAO is coordinating scientists outside of biotech hotspots like Boston or Paris to double the number of life-saving therapeutics available to patients.
Sourcing truth: A doctor is building a DAO to incentivize the crowdsourcing of truthful information in critical industries such as healthcare and public policy.
Storytelling: Filmmakers are building a DAO to crowdsource information from historians, journalists, and regular citizens to fact-check a television series about Ukraine in the 21st century.
The risks of trying to do good through a DAO
Americans are choosing to form and contribute to DAOs even though they are not formally recognized by most jurisdictions in the United States. DAOs represent a new form of social and economic organization. The legal status of DAOs is currently unclear which exposes DAO participants to personal liability.
Even in jurisdictions where DAOs have limited recognition, such as Wyoming, the law often imposes serious constraints and has a chilling effect on social experimentation. Because they operate in a legal gray area, DAO members and leaders are taking a number of risks, regulatory and otherwise. DAOs fail to protect Americans contributing to them in a number of ways that the federal government should help address.
Here are a few examples:
Arbitration and dispute resolution: Is self-imposed arbitration of conflicts between DAO members legally valid? What minimum standards should apply to such arbitration proceedings?
Contracts: When are blockchain-based smart contracts legally binding? How can DAOs form contracts with U.S.-based legal entities?
Custody of property: What rights or claims do DAO members have over the digital assets under custody in the DAO?
Deposit insurance: What protections need to exist for people contributing their digital assets to a DAO?
Employment law: What differentiates employees, contractors, and other types of contributors to a DAO?
Fiduciary duties: What duties do DAO managers or administrative persons owe to members of the DAO?
Intellectual property: When does a DAO own the IP and when do contributors own the IP?
International law: What are the implications of having non-US members contribute to DAOs?
Not-for-profit status: How can DAOs organized around charitable causes obtain tax-exempt status and be able to issue receipts to donors?
Paying taxes: What taxes do DAOs owe? What taxes do their contributors owe?
Workplace protections: Where do DAO contributors turn if their rights are violated?
Will the United States allow internet-based impact to flourish?
Despite the risks outlined above, people are forming DAOs when doing so serves their interests better than a C corporation, B corporation, LLC, or 501(c)3 nonprofit organization.
Many of the world’s largest economies, including the European Union, are establishing comprehensive regulatory frameworks for these internet-native organizations.
To compete in the burgeoning internet-based marketplace for global talent, the United States must provide better clarity for people working in DAOs. When writing rules and regulations for DAOs, the United States should encourage Americans to leverage the internet and digital assets in ways that most benefit American society.