Chairman of the Hong Kong Company Law Reform Committee, Mo Shulian: The DAO of One Country, Two Systems
Mo Shulian believes that a DAO can serve as an officially recognized legal structure by the state while retaining its appeal as a DAO. Hong Kong, with its unique "one country, two systems" framework, is the most suitable place to create such a legal structure.Speech: Mo Shulian, Senior Counsel, Chairman of the Hong Kong Company Law Reform Committee
Source: ForesightNews
The 2023 Hong Kong Web3 Festival, co-hosted by Wanxiang Blockchain Lab and HashKey Group, and organized by W3ME, was held at the Hong Kong Convention and Exhibition Centre from April 12 to 15, 2023. Senior Counsel Mo Shulian, Chairman of the Hong Kong Company Law Reform Committee, delivered the keynote speech.
Here is the content of the speech:
First, I would like to thank Mr. Xiao for inviting me to attend this conference. Ladies and gentlemen, my title is Chairman of the Hong Kong Company Law Reform Committee, but my remarks today do not represent the views of the Committee; they are solely my personal thoughts and have no relation to the Committee. Now, let me begin my speech.
Who founded the DAO, this decentralized autonomous organization? Some believe that the DAO was invented when Bitcoin emerged in 2009. Its inventor, or perhaps inventors, named themselves Satoshi Nakamoto. Although no one knows who this name refers to, some people believe that "sa" represents Samsung, "toshi" represents Toshiba, "Naka" represents Nakamichi, and "moto" represents Motorola, so "Satoshi Nakamoto" is a group formed by Samsung, Toshiba, Nakamichi, and Motorola.
As a Chinese person, I have a different perspective. I believe that the DAO was founded by Laozi. Laozi was born between the 6th and 4th centuries BC. The first six characters of his classic work, the "Tao Te Ching," are "The Tao that can be told is not the eternal Tao." This means that the Tao that can be expressed is not the eternal Tao.
To prove that Laozi was a prophet, some critics have translated the "Tao" in his text as "Meta," suggesting that this DAO transforms into the meta, and the eternal Tao that Laozi spoke of has become what we refer to today as the metaverse.
Other critics are even more avant-garde, proposing a new translation of "The Tao that can be told is not the eternal Tao," interpreting the three occurrences of "Tao" as having three different meanings. The first "Tao" is the way, the second refers to teaching or instruction, and the last one is the constant way, or the eternal Tao. These critics analyze that the meaning of "Tao" in Laozi's statement represents three stages of AI development: the first "Tao" is algorithmic intelligence, the second "Tao" is linguistic intelligence, and the eternal "Tao" is imaginative intelligence.
The first stage of algorithmic AI is represented by AlphaGo from DeepMind, which defeated the world’s top Go player in South Korea in 2016. The second stage of linguistic AI is represented by the current ChatGPT.
What is the third stage of imaginative AI? These critics have prepared answers as well. The "constant way," or imaginative AI, is the next stage of linguistic AI development, which will combine decentralized autonomous organizations with large language models like ChatGPT to achieve self-organization and compatibility with humans.
I have my own interpretation of Laozi's "The Tao that can be told is not the eternal Tao." Laozi believes that the Tao that can be articulated is not the eternal Tao. Applied to the DAO, it can be understood that if a DAO, a decentralized autonomous organization, can be manifested in the traditional sense of a company, then it is not an eternal DAO. In other words, once a DAO is given a formal legal structure, it will ultimately lead to its demise due to the loss of the highly attractive characteristics that define a DAO.
On this interpretation, I disagree with Laozi's viewpoint. I believe that a DAO can both become a formally recognized legal structure by the state and simultaneously retain its attractiveness as a DAO. In fact, Hong Kong, with its unique "one country, two systems" framework, is the most suitable place to create such a legal structure.
So, what are the attractive features of a DAO?
First, a DAO is a reimagined business tool that is easy to operate globally. Anyone with internet access can establish or manage a company or charity, sharing risks or profits.
Second, a DAO operates based on "smart contracts" written in code, rather than traditional association regulations or shareholder agreements. Certain terms in smart contracts can be executed automatically in digital form, thereby reducing the costs of fulfilling agreements and the inconveniences caused by human intervention.
Third, blockchain can store records of the DAO on a secure distributed ledger, achieving permanent storage and immutability of records.
Fourth, by issuing tokens, a DAO can build a distributed crowdfunding platform. Countless stakeholders from around the world can collectively provide the funds necessary for business operations. Token holders can use their tokens to vote on proposals regarding resource allocation and business development within the DAO.
Fifth, a new token can also be an investment, allowing holders to share in the profits.
Sixth, a DAO can integrate the Internet of Things and artificial intelligence to create new products and services. For example, through connected smart locks, a DAO can remotely unlock apartment doors after receiving payment, potentially replacing Airbnb.
At the same time, since DAOs are currently not recognized by law, they face numerous challenges. The Coalition of Automated Legal Applications (COALA), an international non-governmental organization, emphasizes this issue. COALA's members come from organizations such as Harvard Law School, the Ethereum Foundation, BNP, and MakerDAO, and they summarize the following challenges currently faced by DAOs:
DAOs cannot own any legal assets, sign any agreements, initiate lawsuits, or be sued. Token holders of the DAO, at least those voting on the DAO's actions, bear significant uncertainty and unlimited liability.
These issues prevent DAOs from effectively integrating into the off-chain world.
From a legal system perspective, DAOs exist entirely based on the individuals participating in DAO activities, including founders, members, enablers, participants, and external third-party service providers.
When people transact with DAOs today, they often do not consider the associated legal risks and personal liabilities.
On June 19, 2021, COALA published a "DAO Model Law." Once drafted, any country can incorporate its provisions into its national laws and regulations, thereby promoting the full or partial recognition of DAOs as legal entities in more countries.
The "DAO Model Law" currently recognizes two types of DAOs on the blockchain: registered DAOs and non-registered DAOs. The government promotes registered DAOs by applying the structure of limited liability companies to DAOs, effectively allowing these companies to become DAOs. The government of Wyoming in the United States has already adopted this approach.
The "DAO Model Law" also provides a development path for non-registered DAOs. The central idea is that once the "DAO Model Law" is adopted by a country, the DAOs within that country will become legally recognized limited liability entities. This new type of legal entity can be referred to as a Limited Liability DAO or LLD. This is distinctly different from the Wyoming-style approach of wrapping existing DAOs in a layer of limited liability company structure.
The core content of the "DAO Model Law" consists of 11 technical and governance requirements. DAOs must meet these requirements to be recognized as independent legal entities with limited liability. These requirements include: being deployed on a public blockchain, having a unique public address accessible to anyone, open-source and auditable code, compliance with the law, being understandable to the average person, a decentralized governance system, having a representative who can be contacted at any time, and having a dispute resolution mechanism followed by the DAO and its members.
Additionally, there are the following important provisions:
The "DAO Model Law" explicitly states that the minimum capital requirement is non-mandatory.
Holding office or having decision-making power within a DAO does not necessarily incur corporate responsibilities.
From a tax perspective, a DAO is a transparent entity that does not pay income tax. If there are tax obligations in the relevant jurisdiction, the income tax of the DAO is paid by its members through personal income tax. Most Australian trusts operate under this tax model as well.
If a DAO refuses to comply with a legal judgment, voting members must pay fines in proportion to their voting weight.
I would like to share two cases of governments that have adopted or partially adopted COALA's "DAO Model Law."
First is the state of Utah in the United States. On March 1, 2023, the Utah government passed HB357, the "Utah Distributed Autonomous Organization Act." Like the "DAO Model Law," this act grants limited liability to DAOs. Furthermore, the way the Utah DAO Act defines DAO membership is consistent with the typical approach adopted by DAO communities, while setting technical thresholds to ensure the purity of the DAO. The Utah DAO Act protects the rights of DAO members through appendices rather than operational bylaws, introduces warranty requirements for DAO protocols, and establishes clear tax treatments that align with current DAO functionalities. Unless explicitly stated, DAO participants do not bear defined credit liabilities.
Another potential adopter of the "DAO Model Law" is the UK government. On November 16, 2022, the UK government requested the Law Commission to conduct a 15-month study to understand the characteristics, components, and how the laws of England and Wales treat DAOs, as well as their impact on UK company law and financial regulations. This move aims to clarify the legal status of DAOs in the UK and lays the groundwork for the UK to realize its ambition of becoming a global center for crypto asset technology.
I propose that in Hong Kong, we should also conduct a similar study. With government support, we can explore whether to emulate Utah's approach by adopting COALA's "DAO Model Law," or like Wyoming, allow qualified DAOs to register as limited companies. I am personally optimistic about this and believe it is a feasible way to advance.
If Hong Kong legally recognizes the status of DAOs, it will bring the following benefits:
First, it can make Hong Kong a hub for Web3 infrastructure and DAO ecosystems in Asia, attracting a large number of innovative enterprises and investments to Hong Kong, further consolidating its image and reputation as a global financial center.
Second, innovating DAOs in Hong Kong can also invigorate the "one country, two systems" framework and the Greater Bay Area. Hong Kong is the most internationalized city in China. In fact, this could be the most valuable contribution Hong Kong can make to China. Early adoption of DAO legislation will also enhance Hong Kong's reputation as a forward-looking international city.
Third, recognizing DAOs as legal entities can provide clear guidance for their operations, reducing the potential for fraud and activities, and creating a transparent and safe operating environment.
On April 11, the Hong Kong Web3.0 Association was officially established. The Chief Executive of Hong Kong, John Lee, presided over the grand opening ceremony. I would like to quote his original words from the opening speech: "The development of Web3 is at a critical moment, and Hong Kong must have the courage to be a pioneer of this wave of innovation."
The Chief Executive also expressed hope that the Web3.0 Association could collaborate with the government to accelerate the development of technological and financial innovation, attracting more talent and enterprises to Hong Kong.
Legally granting DAOs recognition will undoubtedly be a milestone event and will demonstrate to the world Hong Kong's determination to embrace Web3 innovation.
Hong Kong has implemented common law for over 180 years, a long history that has made it one of the oldest common law jurisdictions in the world. We have judicial independence, and our judges in the Court of Final Appeal come from all over the world, further solidifying our strong legal jurisdiction and reputation. Introducing Web3 ecology and DAO innovation through legislative means will also contribute to the ancient tradition of common law in Hong Kong.
There are three construction workers laboring hard under the sun. A passerby asks them what they are doing. The first worker says he is building a wall. The second worker says they are constructing a building. The third worker smiles and happily says they are building a new city. Ten years later, the first worker is still building walls, the second worker has become an engineer, and the third worker has become the boss of the other two workers.
We gather here today not merely to create a small Web3 application or to undertake a small entrepreneurial project. We are working together to transform Hong Kong into a new city empowered by Web3 and with legal foresight. I believe that after a long period of pandemic isolation, Hong Kong will emerge like a butterfly, rapidly developing to new heights. Thank you all!
