Is a regulatory turning point for DAOs emerging? Controversy arises from the introduction of bills in two U.S. states

Written by: Xiao Za lawyer

In February 2023, Utah released its latest DAO regulatory bill, which takes further steps in legal recognition and limited liability compared to the 2021 Wyoming DAO bill. The main highlights are as follows:

Overview of Utah's DAO Bill Highlights

1. The bill grants DAOs a unique, new form of legal recognition. Utah has decided not to adopt Wyoming's "old wine in new bottles" regulatory approach by applying the limited liability company (LLC) model to DAOs, but instead clearly distinguishes between DAOs and LLCs, creating a new type of legal entity for DAOs through pioneering legislative thinking;

2. The bill explicitly defines DAO organizations as limited liability entities, resolving the controversy regarding whether DAO members should bear unlimited joint liability with personal assets in the 2022 CFTC v. bZx DAO (later renamed Ooki DAO) case;

3. It establishes a tax system for DAOs;

4. It clarifies that DAO participants do not have implied fiduciary duties unless these obligations are explicitly stated to apply to participants;

5. It protects the anonymity of DAO participants;

6. It incorporates "technical gatekeeping" measures to ensure that a DAO is essentially a DAO.

I. Overview of Utah's DAO Bill

The Xiao Za team has systematically introduced what a DAO is, and interested partners can refer to: "Original | Will DAO be a new type of 'company' in the future?" We will not elaborate further today. As a new type of business entity that has emerged in recent years, DAOs differ significantly from existing business structures in various aspects such as personnel composition, operational management, profit distribution, and taxation. Therefore, there has always been controversy regarding the legal nature and regulatory measures of DAOs. Although many real cases of DAOs have emerged in various countries, these DAOs still remain in a state of "old wine in new bottles" regarding regulatory measures and legal nature. This situation arose mainly because Wyoming set a precedent in 2021 by comparing DAOs to LLCs, which are more similar to real-world entities and have already matured, even allowing for the conversion between Wyoming's DAOs and LLCs. In other words, under this regulatory approach, a DAO is an LLC, and an LLC is a DAO.

To be honest, when facing new technologies, comparing them to old entities for regulation is the most common strategy, but it is essentially a compromise by legislative bodies and regulatory agencies: while comparative regulation can address immediate needs, it overlooks the uniqueness of emerging entities, which is not conducive to long-term development.

Therefore, after careful consideration and intense discussion, Utah has taken a significant step in the field of virtual asset regulation, expressing its sincerity in embracing virtual assets through actual legislative action: the "Utah Decentralized Autonomous Organizations Act," abbreviated as the "Utah DAO Bill." Many contents of this bill largely reference the DAO Model Law proposed by the crypto community COALA, thus making some very "innovative" provisions regarding the legal status of DAOs and their limited liability.

II. Wyoming vs. Utah: What are the similarities and differences in DAO regulation?

For most partners unfamiliar with the United States, Wyoming and Utah have very low visibility, lacking major cities with recognizable names or globally renowned universities, and even famous local specialties are few. Beyond their lack of recognition, Wyoming and Utah share many similarities: both have beautiful scenery and rich mineral resources, yet their economic development is relatively lagging; both rely on agriculture (animal husbandry) and mineral processing as their main pillar industries; both have vast lands but sparse populations; both hold a positive attitude towards the virtual asset industry…

In terms of DAO regulation, Wyoming and Utah have also sequentially introduced relevant bills. The Xiao Za team has already introduced the situation in Wyoming (for details, see: "Original | Will DAO be a new type of 'company' in the future?" and "Xiao Za Team | Can DAO operate legally in China?"). Today, we will discuss Utah's innovations based on comparison.

Overall, Wyoming's DAO bill is relatively rough and does not address many technical characteristics of DAOs, instead simply using LLCs as a reference for comparative regulation. In contrast, Utah's DAO bill is more detailed, not only attempting to provide its own answers to the challenging issue of taxing virtual assets but also making provisions for technical aspects such as hard forks. However, while Wyoming's approach may be lazy, its DAO bill is more grounded and aligns well with existing business systems. Utah's DAO bill is filled with idealism, but the actual execution results are difficult for the Xiao Za team to predict.

III. Utah's DAO Bill: Compromise or Tolerance?

The Xiao Za team believes that while Utah's DAO bill provides a more forward-looking regulatory framework for practitioners in the virtual asset industry, it also faces many practical issues that need to be addressed.

First is the bill's enforceability. The overly novel legal personality innovation and limited liability provisions may not have sufficient normative supply under the current corporate law system in the United States, and law enforcement agencies may not possess the regulatory capabilities required by the bill. In simple terms, the lofty ideals of Utah's DAO bill may struggle to find a foothold in the real world because the cutting-edge institutional innovations do not match the existing business rules in the U.S., potentially disrupting an already established and relatively stable rule system. This contradiction is gradually emerging; on one hand, the tax provisions in Utah's DAO bill differ from past practices and have certain discrepancies with the federal tax system. How to resolve tax conflicts and create a taxation and assessment rule applicable to virtual assets and DAO organizations will be a key consideration for the future. On the other hand, as a state whose pillar industries are traditional animal husbandry and manufacturing, Utah itself lacks experience in financial and commercial regulation, and relevant law enforcement agencies lack the regulatory enforcement capabilities required by the bill.

Secondly, the bill introduced by Utah after referencing Wyoming's DAO bill and the COALA model law is too rushed and lacks practical norms. Although the bill highlights the characteristics of blockchain technology in its specific provisions and seemingly provides operational regulations for hard forks, blockchain upgrades, etc., the actual feasibility remains to be assessed in the future. Currently, countries and regions around the world are choosing to postpone legislation on emerging entities such as NFTs and DAOs, not due to a lack of relevant legislative experience or technology, but because these emerging entities are still in a rapid development phase. Rushed legislation may improperly restrict the development of new technologies. Therefore, rather than saying that Utah's DAO bill represents a "tolerance" of the crypto industry under the existing system, it is more accurate to say that the state is urgently seeking a "compromise" to achieve revitalization and development through the crypto industry.

IV. Final Thoughts

If an idealized bill not only fails to solve real-world problems but also negatively impacts financial security and social stability, it would be better to return to the era of "old wine in new bottles." However, we also strongly affirm Utah's goodwill and tolerance towards the virtual asset industry demonstrated in the DAO bill, as well as the institutional innovation of distinguishing DAOs from LLCs. Nevertheless, human commercial systems and dispute resolution mechanisms have undergone hundreds of years of evolution, forming an established rule system. Making changes in the short term is a very difficult task, and during this period, it is crucial for virtual asset practitioners to maintain sufficient patience and confidence.