Marshall Islands and Crypto: Best Place for DAOs Amid New Global Regulatory Crackdown
The Marshall Islands have recently amended a landmark bill to provide DAOs with legal protection. Source: Shutterstock.
- In December 2022, the Marshall Islands became the first country to legally recognize DAOs.
- In October 2023, it amended the bill to streamline the process.
- DAOs can register in the Pacific country without a local office or law firm.
When the FTX crypto exchange collapsed, taking with it billions in customer funds, regulators and lawmakers smelt blood. Once fooled by the eccentric charms of Sam Bankman-Fried, regulators and policymakers swung back in the other direction, hammering crypto and anything it touched.
The fall of Changpeng Zhao, or “CZ”, the former Binance CEO, will likely unleash a new wave of regulatory crackdown like the one that followed. One of the aspects of blockchain that could come under increased scrutiny is decentralized autonomous organizations (DAO). A new way of organizing based on web3 principles.
What Is A DAO?
DAOs are a relatively new form of organization that lives on the blockchain. DAOs first popped up around 2016, when developers started experimenting with the idea of leaderless organizations that run automatically based on programmed rules.
The idea is that by encoding an organization’s rules into smart contracts on a blockchain, you can create a structure and governance system that doesn’t rely on traditional hierarchies. Participants can propose and vote on ideas that shape the future of the DAO. And they can pool funds that get released only when certain conditions are met.
DAOs create new possibilities for coordination and collaboration among strangers on the internet. Say you want to start a film studio – you could kickstart the funding from passionate movie fans around the world, who can have a say in what films get made. Or you could create an investment fund that democratically determines how pooled money gets spent.
DAOs Are Largely Unregulated
However, despite their perceived benefits, DAOs are largely unregulated, and there are aspects that are could still get its members into trouble. Back in 2017, the U.S Securities and Exchange Commission concluded DAO tokens — used to represent ownership or voting rights — were securities. A designation that comes with a raft of regulations and oversight few DAO enthusiasts want.
Although, despite the designation, DAOs still operate in a legal gray area. As leaderless, blockchain-based entities, they don’t neatly fit into existing legal structures. This leaves DAOs and their members vulnerable.
Take the recent case of bZeroX (bZx). Its successor entity, Ooki DAO, offered illegal commodities trading. The Commodity Futures Trading Commission (CFTC) imposed fines. More shockingly, they held bZx’s founders personally liable for Ooki’s activities – despite having already transferred control.
The CFTC justified this based on precedents allowing personal liability for members of unincorporated associations. But their definition of “member” – anyone who voted using an Ooki token – troubled Commissioner Summer K. Mersinger. She argued this arbitrarily punishes some token holders over others, when an aiding-and-abetting charge could have achieved the same result.
There was also a recent class action suit against bZx by DAO members who lost funds in a hack. A court ruled the DAO can be seen as a partnership under the law in California. The court highlighted that just owning tokens used for making decisions in the organization, even if you don’t actually vote, can be enough to be considered a partner.
A few U.S states have enacted DAO legislation, but approaches vary. Wyoming offers LLC status and liability protections. Vermont authorized blockchain-based LLCs with customizable governance. But most DAOs remain unincorporated and at risk.
Why The Marshall Islands?
Amidst this regulatory uncertainty in the U.S. and elsewhere, The Marshall Islands, a nation tucked away in the Western Pacific, is strengthening its position as a global hub for incorporating DAOs.
Last month, the tiny island nation passed amended legislation building on its landmark 2022 Decentralized Autonomous Organization Act . The new law aims to provide the most comprehensive legal framework globally for DAOs.
The original December 2022 bill includes the establishment of a DAO registry overseen by the local DAO-focused firm MIDAO, allowing any DAO to incorporate in the Marshall Islands as a DAO LLC under an LLC structure. The legislation also reduces or eliminates fiduciary duties for DAOs, exempts them from certain LLC requirements, and permits engagement in governance measures and investment activities, while also setting up a government-run investment fund for DAO education and integration into the economy.
Under the amended Act, DAO registration times are faster – just 30 days maximum instead of 30-60 days previously. DAOs also now have explicit protection from liability for any open-source software they create, even if others misuse it. Additionally, most governance tokens will not be classified as securities.
The law also uniquely recognizes “Series DAO LLCs” – DAOs within DAOs, which have separate assets and liabilities from their parent. This accommodates the common practice of sub-DAOs.
Setting up a DAO in the Marshall Islands
To open a DAO, you can hire a registered agent MIDAO to handle the streamlined incorporation process remotely. The process is open to DAOs from across the globe, and there is no need to open a local office or hire a local law firm.
The strengthened legal protections and speedy registration process aim to cement the Marshall Islands as the premier jurisdiction for DAO creation.
While this small nation is rolling out the red carpet for DAOs, larger countries are still grappling to regulate them. The amended Act serves as a blueprint for how governments worldwide may one day facilitate – rather than restrict – decentralized organizations. And a testing ground for any potential failures. But, for now, the Marshall Islands enjoys a first-mover advantage in offering DAOs a safe harbor.
