A study into legalisation of

Decentralised Autonomous Organisations (DAO)

Subject : LAW4028H S LEC0101 20231:

Blockchain, Digital Assets, and the Law

Course Coordinator : Usman M Sheikh

Author : Jasween Singh Gujral 1004668246

University of Toronto
 1.Introduction

A General Purpose Technology has three important characteristics that set them apart from

other innovations, viz

● their ability to improve, wide penetration of markets,

● further spawns new innovations, and

● put forward contemporary information1

One of the general-purpose technologies of the decade is Blockchain technology which has

the potential to change the traditional record keeping methods as it offers an immutable

data recording system which allows automation and decentralisation of processes and

algorithms. It can be used for money transfer, smart contracts, internet of things , personal

identity security, logistics, non-fungible tokens, land titles recording keeping and any

traditional record keeping mechanism.

This paper takes a deeper dive into yet another use case of blockchain technology, namely,

Decentralised Autonomous Organisation (DAO). There is no universal definition of a DAO,

according to Investopedia, it is an emerging form of legal structure that has no central

governing body and whose members share a common goal to act in the best interest of the

entity.

Popularised through cryptocurrency enthusiasts and blockchain technology, DAOs are used

to make decisions in a bottom-up management approach.2 In simple terms, it is a system

that is collectively owned by its members ( token-holders) and wherein decisions are voted

upon by them itself without having a centralised entity responsible for decision making.

1
Is Blockchain a General Purpose Technology? by Ethan Kane :: SSRN
2
Decentralised Autonomous Organization (DAO): Definition, Purpose, and Example
(investopedia.com)

2
The most landmark work done by any institution to aid legalisation of DAOs is done by the

The Coalition of Automated Legal Applications (COALA)3. It is an international,

multidisciplinary, collaborative research and development initiative that endeavours to bring

clarity and reduce legal uncertainty in the field of blockchain technologies, smart contracts

and decentralised applications. Its research is intended to support the development and

facilitate the deployment of blockchain based applications in today's regulatory framework,

and has published a Model law(ML) for DAOs, since currently DAOs face significant legal

uncertainty that can be detrimental to their development and utilisation.

The State of Wyoming, USA, has also been in the forefront of pioneering permissive crypto

legislation. It has been the first state to legally recognize a DAO. The State of Utah also

followed the lead and granted legal recognition to a DAO. However, both the States have

had a distinct approach. While the state of Utah incorporated principles of the COALA Model

Law, the Wyoming model based its approach on traditional common law principles.

The paper will be explaining the concept of DAO to find out if the technology can be dubbed

as groundbreaking, the areas of industries which can be revolutionised using the technology.

Critiquing the KOALA Model law juxtaposing it with the Wyoming and Utah model. And will

conclude with lessons for Ontario on how to follow suit.

3
About Us | COALA

3
 2.Evolution of DAOs

The World Wide Web is a system of interlinked hypertext documents accessed via the

Internet4. With a web browser, one can view web pages that may contain text, images,

videos, and other multimedia and navigate between them via hyperlinks.5

To put things into perspective, the Web 1.0 (Web of documents) was the first implementation

of the world wide web (WWW) that was introduced by Tim Burners-Lee in late 1989. It was

characterised by simple status websites that were read only in nature.6 This era laste

between 1989 to 2005.7 The technology evolved into Web 2.0 ( Web of people ) which was

defined by Dale Dougherty in 2004 as a read-write web.8 It introduced the capacity to build

applications that harness network effects to get better the more people use them.9

Web 2.0 is not only a new version of web 1.0 but it also implies flexible web design, creative

reuse, updates, collaborative content creation and modification in web 2.0. This should be

considered as one of the outstanding features of web 2.0 which is to support collaboration

and to help gather collective intelligence rather than Web 1.0. 10 It's safe to say that currently

the world is transitioning from Web 2. To Web 3.0

The word Web 3.0 (Web of Data) was coined by John Markoff of the New York Times, as

the third iteration of the web in 2006.11 It can also be called the executable web. The basic

4
World Wide Web Consortium (W3C)
5
World Wide Web and Its Journey from Web 1.0 to Web 4.0
6
Tim Berners-Lee, The World Wide Web: A very short personal history (w3.org)
7
Ibid 5
8
Berners-Lee, Tim; Fischetti, Mark,” Weaving the Web”, Harper San Francisco, chapter 12, ISBN
978-0-06-251587-2.
9
O’Reilly, Definition of Web 2.0. What Is Web 2.0 - O'Reilly Media (oreilly.com)
10
Ibid 5
11
Nova Spivack, “Web 3.0: The Third Generation Web is Coming” Web 3.0: The Third Generation
Web is Coming (lifeboat.com)

4
idea of web 3.0 is to define structured data and link them in order to more effectively

discover, automate, integrate, and reuse across various applications.12

Web 3.0 is a web where the concept of website or webpage disappears, where data isn’t

owned but instead shared, where services show different views for the same web or the

same data.13 Those services can be applications (like browsers, virtual worlds or anything

else), devices or other, and have to be focused on context and personalization, and both will

be reached by using vertical search.14

Blockchain is a decentralised technology that uses smart contracts to execute transactions.

These smart contracts define the semantics of a web 3.0 application. As a result, everyone

who wants to develop a blockchain application must use the shared state machine. The idea

of creating a DAO is another step in the wake of the Web 3 development.

A decentralised autonomous organisation (DAO) is an emerging form of legal structure that

has no central governing body and whose members share a common goal to act in the best

interest of the entity. In other words, it is a community of people with shared interests and

responsibilities. The governing rules in a DAO are encoded into a blockchain using a smart

contract. A great resource for popular DAOs has been done by The Block research15, listed

in the following image -

12
Ossi, Nykänen, “Semantic Web: Definition”, Semantic Web - W3C
13
Ibid 5
14
Mind Booster Noori: What is Web 3.0?
15
Digital Asset 2022 Outlook - The Block Research (tbstat.com)

5
Given its vast potential, it is vital to understand how various regulatory environments

influence their operations. The system has a potential to have a significant influence

regarding traditional methods of governance, decision-making and fund-raising.

Some of the examples how DAO can be used are -

● Charity

● Collective ownership

● Venture Capital/ Financial services

● Services

● Infrastructure

● Non fungible Tokens

● Social media platforms

● News and information

6
Although the technology is currently in nascent stages, countries across the globe are

beginning to recognize them as a viable business structure and attributing it with legal fiction

of personhood. This will result in them becoming similar to a company and enabling them to

sue, be sued and hold property and execute contractual relationships in the market.

The first DAO launched in late April 2016 thanks to a month-long crowd sale of tokens that

raised more than $150 million in funds.16 At the time, the launch was the largest

crowdfunding fundraising campaign of all time.17 The DAO was an organisation that was

designed to be automated and decentralised. It acted as a form of venture capital fund,

based on open-source code and without a typical management structure or board of

directors.

However, the technology will be able to attain its real potential only when it is legalised and

regulated by the government. Ironically, government regulation of a DAO is also considered

to be paradoxical by many, since by definition a DAO is supposed to be decentralised to the

extent that no one entity can unilaterally regulate it out of existence, however, regulators

would not be able to properly regulate a DAO without having ‘kill switch’ which enables them

shut a DAO down when its operations has become illegal. Thus, creating the right approach

for its legalisation is a critical one which needs to balance the traditional legal system with its

unique technological selling point.

16
Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO
17
Decentralised Autonomous Organization (DAO): Definition, Purpose, and Example
(investopedia.com)

7
 3.COALA Model law

The KOALA (Coalition of Automated Legal Applications), has been constituted by legal

experts and social activists from Harvard Law School, Ethereum Foundation, BNP Paribas

and MakerDAO, who have been working on the DAO Model Law since it was first

announced on 19 December 2019.18

And after 18 months of their announcement, COALA finally published its DAO Model Law. In

their words it's a transnational legal framework for DAOs, with the aim to become

foundational documents of best practices for developers, administrators and members and

participants of DAOs. The Model Law is drafted to make it easy for States to directly adopt

the principles into their domestic legislations.

According to the authors, the ML is intended to create uniformity and legal certainty, while,

unlike other regulatory frameworks for DAOs, still accommodate flexibility for further

innovation by not imposing formal registration requirements.19 The ML seeks to address the

issues with legislation with respect to three agency problems, namely,

● Vertical, i.e. Principal Agent

● Horizontal i.e. Majority - Minority principals

● Firm- Stakeholder agency

While retaining the unique features of DAOs and crypto-economic systems.

The ML is intended to serve as a touchstone for adopting its principles into their domestic

law. Thus, enabling a DAO which has been coded and/or constituted based on the ML

principles to be qualified to be recognised as a legal entity in such State.

18
The DAO Model Law. The DAO Model Law series will reflect… | by COALA || Medium
19
Ibid 15

8
It advocates to grant limited liability to any DAO which is formed in compliance with the ML.

And further considers an announcement by the DAO that it has fulfilled the aforementioned

requirements conclusive evidence for the recognition under the Model Law and does not

mandate a registration from an Accreditation authority.

The ML advocates on two types of equivalences, Functional and Regulatory. Functional

equivalence is to allow an establishment of equivalence between an object within the realm

of legal rule and another object not yet encompassed by it. Just like the UNCITRAL model

law for Electronic commerce established functional equivalence between an electronic

document to paper-based document. It advocates to recognise ‘tokenized’ shares that are

recorded on a blockchain based registry to be equivalent to valid titles to shares instead of

introducing new corporate rules specifically applicable to crypto tokens.

The Regulatory equivalence relies on the same techniques but identifies the object of a law

as its goal. By identifying the objective of the policy behind a regulation and considering

processes that can be deemed to fulfil the underlying purpose and assessing how

technology can be used to address the objectives and procedures. The advantage of this

approach is that new technologies can be legitimised into existing legal frameworks which

obviates the need of major legal reforms thus preventing fragmentation of the regulatory girls

and creation of specialised laws.

It argues that the purpose behind registration of a body corporate is publicly and reliability,

which is underwritten by the trust people have in public authorities. The same is achieved in

a smart contract deployed on a blockchain since once deployed the DAO is verifiable by

anyone as its inscribed in a public blockchain, although it's not functionally equivalent.

9
On these grounds the ML argues in favour of granting legal personality to a DAO which can

enable a DAO to -

1. Buy, sell, acquire, hold, develop and/or dispose of both immovable and immovable

property.

2. To sue and be sued

3. Do such acts and things as body corporate may lawfully do and suffer.

The basic premise is to establish legal recognition to a DAOs at the same footing as of an

incorporated body. This is to enable DAOs to engage in social, environmental or

philanthropic activities alongside economic activities. It recognises DAOs to be a for profit as

well as non for profit entity.

Definitions

The KOALA model law defines DAO in its Article 3 (7)20. as -

“Decentralised Autonomous Organization” (DAO) refers to smart contracts (i.e.

blockchain-based software) deployed on a public Permissionless Blockchain, which

implements specific decision-making or governance rules enabling a multiplicity of actors to

coordinate themselves in a decentralised fashion. These governance rules must be

technically, although not necessarily operationally, decentralised.

Article 3 (37) defines a smart contract as follows -

“Smart Contract” is code deployed in a blockchain environment. It is made of a set of

predefined and deterministic interactions executed in a distributed manner by the nodes of

the underlying blockchain network, if and when the underlying conditions are met. Execution

of a Smart Contract will produce a change in the blockchain state.

20
DAO Model Law (coala.global)

10
The definition clause also defines key nomenclature used in blockchain coding such as

Airdrop, Asset, Contentious fork, developer, failure event, GUI, hard fork, Majority and

minority chain, off/on chain, Permissionless blockchain, token etc. It also defines traditionally

used legal terms in the context of a DAO such as Dispute redressal mechanism, by-laws,

Accreditation Authority, Administrator, legal representative member, Quality assurance etc.

The core of the DAO Model Law is 11 technical and governance requirements that a DAO

needs to meet to benefit from legal personality and limited liability. These 11 requirements

are listed in Article 4. Formation requirements, and are summarised as follow:

1. The DAO must be deployed on a public blockchain (permissionless);

2. The DAO must provide a unique public address through which anyone can review

the DAO’s operations;

3. The whole code of the DAO must be open sourced;

4. The code of the DAO must be audited by independent agencies;

5. There must be at least one Graphic User Interface allowing laypersons to read key

variables of DAO smart contracts and token restrictions (if any);

6. The DAO must have by-laws that are comprehensible to a layperson and listed in a

public forum;

7. The governance system of the DAO must be technically decentralised;

8. There must be at least one DAO member at any given time;

9. There must be a publicly specified mechanism that allows a layperson to contact the

DAO and all members should be able to assess the contents of its communication;

10. The DAO must have a dispute resolution mechanism that the DAO and it’s members

and participants are bound by; and

11. The DAO must have a dispute resolution mechanism to resolve disputes with third

parties that are capable of being settled by alternative dispute resolution.

11
The emphasis is laid upon permissionless blockchain as they can serve the same purpose

as traditional government registries, i.e. provide a forum to find out with whom a person is

going to be dealing with. A private or permissioned blockchain works more like a private

company such that they have predefined accounts and actors and thus can be centrally

controlled. Using a permissionless blockchain makes it possible to interact with persons and

entities one does not know, which is a key ingredient in doing business. This gives DAOs a

unique identity which makes it distinguishable from the rest by designating a Public Address.

This is achieved while maintaining privacy and pseudonymity of its Administrators, members

and participants.

In order to register a legal person the physical registered address solves the issue of finding

the national legal system to communicate with respect to the entity and also determines the

national law that governs the entity. Thus, a jurisdiction that adopts ML would also need to

allow electronic communication and serving of documents. Secondly, by specifying a

Dispute Resolution Mechanism(DRM) for resolving issues amongst its Members, it provides

stakeholders with means to redress against the DAO should the need arise. The final

decision will be required to be made public while anonymizing the names and identifiable

information of the disputing parties where relevant. Jurisdictions should recognise any final

decision reached by the DRM and for matters that cannot be resolved by ADR, a Legal

Representative will be appointed to represent the DAO as a legal entity.

The next feature in the ML is to recognise limited liability and member rights in Article 5. It

states that the members will only be responsible for providing the On-chain contributions that

they have committed to the DAO, as required by the By-laws. It also sets the member free

from any obligations including labour and tax implications that fall out of the scope of the

DAO. In case the DAO refuses to comply with an enforceable judgement, the members who

voted against compliance shall be held personally liable for the award in proportion to their

governance right in the DAO. Although, it doesn’t grant immunity to its Members for a tort

12
action for their own wrongful act omission but does not hold members jointly and severally

liable.

The key points covered under the ML are summarised as follow -

● it suggests that States might authorise a regulator to monitor whether a DAO

continues to meet the 11 requirements for legal personality;

● it strives to maintain the pseudonymity of DAO members and participants;

● it sets out the potential actions that may lead to DAO members forfeiting limited

liability protection;

● it clarifies that minimum capital requirements are not mandatory for DAOs;

● it provides a high degree of discretion to DAOs in how they establish their

organisational, governance and capital structures;

● it makes clear that merely holding a position or decision-making power within a DAO

is not in itself sufficient to imply fiduciary duties;

● it specifies that general business organisation law should be applied to DAOs by a

ratifying jurisdiction where lacunae remain after the application of the Model Law and

any DAO by-laws;

● it promotes the recognition of DAOs as pass-through entities for tax purposes, similar

to the tax treatment of most trusts in Australia;

● it recommends that, if a DAO refuses to comply with an enforceable judgement, the

DAO members who voted against compliance will be liable for any monetary

payments ordered in proportion to their share of governance rights in the DAO;

● it clarifies that recipients of governance tokens via airdrops are not, without more,

DAO members; and

● it resolves that, in the event of a hard fork, legal recognition and asset ownership will

follow the majority chain (unless decided otherwise by the DAO).

13
 4.Wyoming State law

On July 1, 2021, Wyoming’s Decentralised Autonomous Organization (“DAO”) law (Wy. Stat.

§ 17-31-101 through 17-31-115) became effective.21 This establishes Wyoming as the first

U.S. state to define the legal status of, and formally recognise as a separate entity, a

decentralised autonomous organisation and its members. It also lays the groundwork for this

expanding industry to offer participants in unincorporated groups, whose governance is

typically incorporated into smart contracts, a formal legal entity structure.

The State of Wyoming has taken the approach to recognise DAOs as a Limited Liability

company having its articles of organisation containing a statement that the company is a
22
DAO. The DAO Law makes it clear that DAOs may employ the LLC legal entity structure if

they abide by its other provisions, such as maintaining a registered agent in Wyoming for

service of process.

If the articles are silent, the DAO defaults to being a member-managed organisation. The

articles of organisation for the DAO might specify whether the DAO is algorithmically

managed or member-managed. A publicly accessible identifier of any smart contract directly

used to "manage, facilitate, or operate" the DAO must also be included in the DAO's articles

of organisation.

The law mandates that the underlying smart contracts for an algorithmically governed DAO

must be capable of being updated, amended, or upgraded in some other way. This means

that DAOs that take advantage of Wyoming’s LLC law still will maintain some modicum of

centralization and human control. Additionally, the DAO’s articles of organisation must be

amended when the DAO’s smart contracts have been updated or changed.

21
Crypto, DAOs, and the Wyoming Frontier | Holland & Hart LLP - JDSupra
22
Wyoming Statutes § 17-31-104 (2022) - Definition and Election of Decentralised Autonomous
Organization Status. :: 2022 Wyoming Statutes :: US Codes and Statutes :: US Law :: Justia

14
The State of Wyoming has experimented with the LLC in response to the need for a

commercial entity that was adaptable and free of the strict corporate procedures associated

with the corporate form. With minimal liability for shareholders and informal processes for

partner decision-making, it combined the finest aspects of partnerships and corporations.

The Wyoming DAO statute makes the first strides towards developing regulatory norms and

practises for DAO-based company operations, even if it does not present a fundamentally

new structure. This will open the door for additional legislation based on the DAO Law.

The Stable Token Act

Despite being rather brief, the Act features a number of key provisions. It also creates the

Commission, allocates a budget of $500,000 to the Commission, and specifies a timeframe

for the issuing of the Stable Token—December 31, 2023.23 The Wyoming Stable Token,

which will be held in trust by the state of Wyoming and used only to enable the redemption of

Wyoming stable tokens, is also referred to in the Act as "a virtual currency representative of,

and redeemable for," one US dollar. All funds received for the issuance of Stable Tokens will

be invested in US Treasury Bills by the trust, which will be managed by the Commission.

However, Wyoming will not guarantee or insure the Stable Token, and the state will not be

required to redeem the Stable Token for sums greater than those held in the trust account.

Additionally, any fiduciary obligation to holders of Stable Tokens is expressly disclaimed in

the Stable Token Act. The Stable Token resembles a government money market mutual fund

due to these features, but without the federal regulation that governs the intermediation role

of these sorts of funds. Additionally, they change the Stable Token from a general obligation

that is supported by the full faith and credit of the state to a particular obligation of the state.
23
Bill Detail (wyoleg.gov)

15
The Act establishes a procedure by which the Commission will develop a framework for

creating the Stable Token and answer any unresolved logistical and legal issues that will

arise during the Stable Token's issuance. For instance, the Act mandates that the

Commission consult with pertinent government organisations, such as the US Department of

the Treasury, the US Internal Revenue Service, and the US Securities and Exchange

Commission ("SEC"), in order to get decisions and other guidance. This authority is also a

covert recognition of the Stable Token's legal ambiguities.

Challenges

The Stable Token and the Act raise a number of problems that the Commission must

address and resolve before issuing the Stable Token. Federal regulatory, state and federal

constitutional, and philosophical barriers are a few of them. In conclusion, the Commission

still needs to work on constructing and releasing the Stable Token, and market and

legislative dynamics could affect the Commission's capacity to do so.

16
 5.Utah State law

The Utah DAO Act adopted a variation of the COALA model law, which accomplishes more

than the straightforward "LLC wrapper" approach and goes farther in achieving a level of

"legal personality", limited liability protections, and opportunities for decentralisation and

anonymity. The recognition of DAOs personhood would enable them to interact more

smoothly with the world and provide limited liability to their members. Limited liability protects

people involved in the DAO from being individually and jointly responsible for the DAOs

activities and liabilities.c

The Utah DAO Act specifically, among other things:

1. gives an abstract definition of the DAO ownership/participant base that is in line with

the facts and spirit of a diverse and intricate DAO community.

2. includes a technical gatekeeping feature to ensure that the DAO is, in fact, a DAO.

3. uses "Bylaws" (rather than an Operating Agreement) to protect anonymity of DAO

ownership and participants.

4. introduces standards for DAO protocol quality control.

5. creates a tax treatment that is more precise and in line with current DAO features.

6. demonstrates that DAO participants do not have any implicit fiduciary obligations

unless those obligations are expressly stated to exist.

Unlike the Wyoming model, a limited liability company is not a DAO, and a DAO is not a

limited liability company. The Utah DAO Act grants the DAO a form of legal recognition that

is unique to DAOs.

17
The Utah DAO Act

On March 1, 2023 with the amendments (and compromises stated above) the Utah DAO Act

was passed unanimously by both the House and the Senate.

The debates and discussions at the House and the Senate revolved around three key

issues:24

1. Accountability: Require each DAO to have a disclosed incorporator, while still

allowing the DAO participant base to remain anonymous (and “redacted”).

2. Tax Language: solicited the participation of the Utah Tax Commissioners’ office to

propose acceptable tax language, which is indeed more nuanced and consistent with

the tax complexities of a DAO (that language can be reviewed under Section

48-5-406 of the Bill).

3. Ramp-Up Time: agreed to make the effective date of the bill 2024.

The "Utah Decentralised Autonomous Organisations" Act (Utah DAO Act) establishes a

precise tax treatment consistent with existing DAO functionalities, defines the DAO

ownership/participant base, incorporates a gatekeeping technology function, and introduces

quality assurance requirements for DAO protocols.

A special task force has been appointed to work along with the Utah department of

Commerce for the 2024 implementation of the new Utah DAO act. The task force will be

responsible for finding opportunities to build and eventually pass a complementary DAO

legislation which is supposed to take effect in January 2024..

Additionally, the Utah DAO Act grants DAOs limited liability and legal recognition while

simultaneously referring to them as "Utah LLDs." Under this entity the organisers and

24
Utah Innovates Decentralised Autonomous Organizations Legislation (natlawreview.com)

18
tokenholders of DAOs are not personally liable for the acts of the business, just like an LLC

or a corporation. The Act specifies who owns DAOs and uses bylaws to safeguard

anonymity that complies with DAO rules. In order to assure precise distinctions in tax

treatment and updated DAO features, it also offers quality assurance DAO protocols.

The Act also introduces quality assurance DAO protocols, defines ownership of DAOs,

safeguards DAO-compliant anonymity through bylaws, and seeks to provide the greatest

amount of flexibility for innovation.The Act's inclusion of quality assurance DAO protocols is

crucial to assuring clear tax treatment and modernised functionalities. These protocols give

DAOs a standardised way to run its operations, guaranteeing transparency and upholding

investor confidence.

DAOs can operate under the law without jeopardising people's privacy because of the law's

restrictions requiring organisers and token holders to refrain from exposing themselves. The

State will redact all names and personal information related to the LLD before the DAO's

information is published on the Utah Division of Corporations website. Although the

organiser need not be a Utah resident or even a citizen of the United States, the legislation

stipulates that they must be mentioned when the DAO's bylaws are submitted. Thus, DAO

operators and organisers can maintain their anonymity, which also gives the authorities

access to some information about the organisation.

One of the biggest challenges the task force will be facing is “educating lawmakers” about

the underlying blockchain technology and how it enables DAOs to exist. Since, the

technology is itself at a nascent stage and ever evolving which makes it even more

challenging to educate lawmakers about underlying technology. Moreover, the lawmakers

have never before dealt with such a technology before which makes it difficult for them to

take side and appreciate its value proposition.

19
In conclusion, the Utah Decentralised Autonomous Organisations Act marks an important

turning point in the acceptance of DAOs by the law. DAOs in Utah can now function with

more assurance and security thanks to this new legislation because they are protected by

the law. Other states are expected to imitate Utah in recognising the importance of DAOs in

the digital economy as blockchain technology advances. Retrofitting DAOs into conventional

legal frameworks and processes is difficult and frequently insufficient. The best course of

action could be to begin realising that, despite legislative efforts, these organisations are

here to stay.

20
 6.The lessons for Ontario

The blockchain community is embracing decentralised autonomous organisations (DAOs), a

relatively new organisational structure, in its quest to create the "web3" (a reimagined

Internet based on decentralised protocols). DAOs are constructed by pre-programmed

algorithms and have governance frameworks modelled after corporations but modified to

enable "trustless" operations.

DAOs' members don't need to have a lot of faith in one another because of the fundamental

integrity of their governance and protocol systems. As a result, DAO participants can

communicate with one another anonymously by exchanging blockchain address identifiers.

DAOs are not centrally controlled like traditional businesses, but they are comparable in that

their owners (token holders) vote on decisions and that minority owners have built-in

protections to address problems with ownership concentrations.

For some members of the blockchain community, the purpose of DAOs is to do away with

the requirement for shareholder agreements, corporate bylaws, and other documents that

regulate the interactions between people associated with a firm. DAOs are intended to

eliminate the need for expensive legal actions and provide a means of preventing disputes.

Unfortunately, there is currently confusion over the appropriate classification of DAOs in

Canada.

The complexity of identifying DAOs stems from both their innovative structure and the variety

of their functions. DAOs are often not founded as separate legal companies using

conventional processes, despite the fact that they in essence subject their participants to

regulations that are typically found in the corporate records of a corporation and share

comparable governance principles to corporations.

21
In accordance with Canadian corporation law, certain company information must be

disclosed to the public or documented in order to maintain accountability. Conforming to

these rules would run counter to the activities of many DAOs. It is uncertain if any

government would wish to grant token holders the same restricted liability that business

owners are generally given in the absence of either.

Due to their capacity to allow participants to pursue formalised commercial agreements

among themselves, DAOs might be properly described as partnerships amongst their

owners. DAOs initially resemble partnerships. For instance, in Ontario, a partnership is a

relationship between individuals who carry on a company in common with the intention of

making a profit. DAOs give people with similar objectives the ability to coordinate their

pursuit of commercial possibilities. By combining the crowdfund profits received through the

sale of their tokens and allocating these monies to business possibilities chosen by the

owners, DAOs coordinate these initiatives. The aim is for the owners of these

DAO-managed firms to receive a portion of the earnings.

DAOs' "trustless" nature and absence of joint and several liability makes it challenging to

categorise them as partnerships. The fact that economic activities are carried out "in

common" is a crucial component of a partnership.

Additionally, it is unclear whether the DAO's underlying smart contracts may be viewed as

partnership agreements or as documents that express an intent to form a partnership. While

there is a pooling of resources when exploring business prospects through a DAO, the

presence of shared assets, joint ownership of real estate, or a division of gross profits does

not, by itself, prove the existence of a partnership.25 Because of this, it is unclear whether

25
Thinking Back to Partnerships… | Business Organizations Law (ubc.ca)

22
DAOs are a type of partnership or a vehicle for managing jointly owned assets with distinct

and separate beneficial interests among the owners.

Regardless of their legal status, DAOs offer an interesting way to pool resources for both

for-profit and nonprofit endeavours, but they will need more legal certitude to grow

responsibly in the future. Acting immediately, such as by having a conversation about the

legal ramifications of DAOs and evaluating the novel legal relationships they can establish,

can have a number of advantages for both DAO participants and the larger blockchain

community.

The Ethereum blockchain was founded in Toronto, Canada, but due to the legal limbo has

moved to Europe. The market cap of Ethereum is around $ 222 Billion,26 and the company

with largest market cap in Canada (RBC) is at ~$ 136 Billion27The former was launched in

2015 and the latter was founded in 1864. It took less that a decade for a technology

company to attain more net worth than a financial giant which had been amassing wealth for

over a century. The legal vacuum causes innovation to further drift away from a nation which

is fraught with uncertainty. Thus, by taking a systematic approach and being quick to adapt

to such groundbreaking technologies, Canada can become one of the preferred nations for

such Web3 innovations and grow the size of its Gross domestic product.

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Ethereum (ETH) Price, Charts, and News | Coinbase: ethereum price, ethereum, eth price
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Largest Canadian companies by market capitalization (companiesmarketcap.com)

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