Part IV, Chapter 8
Legal Frameworks

Legal Frameworks in the DAO Ecosystem shows the established processes and structures which guide the creation and implementation of laws within the decentralized organizations. The frameworks serve as the bedrock for governance, set up with the intention to outline the rights and responsibilities of members, participants and governance within a decentralized organization. These legal frameworks can expect to host constitutional provisions, administrative strategies, judicial precedents, resolutions and decrees which will structure the legal system of the organization to ensure accountability, transparency and fairness. DAOs are still evolving and thus, its legal frameworks tend to either be an improved version of already existing centralized/traditional legal structures or something that is entirely different and new. However, the process of piloting these legal frameworks would demand the need of legal experts (in blockchain, cryptocurrency, decentralization etc.) who are keen on exploring how legal structures should work within DAOs. This will help in simplifying legal frameworks in such a way that members can have a thorough understanding of applicable laws, compliance measures and regulatory developments, to help in understanding issues that may arise. The end product? Trust. DAOs are governed by smart contracts and all decisions are made by token holders (technically members of the organization). Since this is against the normal structure of centralization, the legal frameworks do not apply in the same measures, but they exist and are needed to ensure that governance is done with ease. These are a variety of reasons why these legal frameworks that suit the processes of decentralization within organizations must be created:

Liability Concerns: Being decentralized, DAOs (unless operating under a governance structure that provides representatives) usually have no one in particular who is legally obligated to provide answers pertaining to legal issues that may arise. In this way, it is hard to pinpoint who should be held liable for the actions or inactions of the DAO. Smart contracts are not foolproof either, and thus, if fraudulent activities take place, the absence of a legal framework more or less gives room for this activity to go unpunished.

Jurisdictional challenges: Since DAOs operate globally, it can be hard to “fix” laws that align with a certain jurisdiction. This can create uncertainty. A legal framework that’s been put in place can easily be presented as a foundation for negotiations in any jurisdiction.

Dispute resolution: More often than not, conflict will arise due to the fact that DAOs involve multiple individuals who are stakeholders in the organization. Legal frameworks that comply with existing laws and regulations must be put in place to resolve disputes in a peaceful and timely manner to ensure that the goal of the DAO is not tampered with.

Taxation: Currently, it is easier to have members of the DAO pay taxes, as opposed to expecting that the DAO pays tax as an organization. However, this exists because of legal obligations. Depending on the jurisdiction under which the DAO operates, compliance with taxation laws is important since it is needed for the funding of public services. Also, DAOs have a higher chance at being legitimately recognized when they fulfill legal obligations and prevent legal issues that stem from non-compliance.

Regulatory Compliance: DAOs must understand the specifications, guidelines and laws that are of importance to its business processes. There are legal frameworks guiding anti-money laundering, taxation, intellectual property and KYC (know your customer) requirements. It is important that the decentralized organization adheres to these regulations to ensure the protection of their members’ rights, prevent financial crimes and verify the legitimacy of transactions. It is also not uncommon for DAOs to engage in fundraising processes. This may also result in the issuance of tokens and the entirety of both processes may fall under scrutiny from securities regulations (where applicable).

Entity Status: DAOs do not exist to create confusion with the manner in which organizations are run traditionally, especially in legal instances. The innovative ways in which DAOs are run can serve as a means for existing structures to adapt and evolve in all areas including but not limited to legal structures.

These are some Legal Frameworks being normalized within the DAO ecosystem:

Legal collaborations To come to terms with the application of already existing laws as well within the DAO ecosystem, DAOs may seek legal opinions from experts and consult with law firms (who most likely have some sort of experience with blockchain and cryptocurrency). This collaboration between legal experts and blockchain technologists will help to assess the legal stance of the DAO and probably set boundaries in areas where there are differences between the law and operations within the DAO ecosystem.

Self- regulation Governance protocols, smart contracts and mechanisms for dispute resolutions amongst others may stand as proof of transparency and accountability within certain jurisdictions that are open to the manner in which decentralization works. This could serve as a base for negotiations, merges and even change as time goes on between traditional legal systems and decentralized methods. Jurisdictional analysis For ease, DAOs can carry out research on different jurisdictions before proceeding with startups in any form. The point of doing this is to ensure that any chosen jurisdiction has favorable or flexible laws which can suit the operations of the DAO or not affect its operations greatly at the very least. There may be a need for legal protections and in this case, DAOs can opt for the establishment of legal entities (such as limited liability companies) to act as a middle man or carry out interactions between them and the traditional legal system. Decentralization is not a fairly new concept and while DAOs hope to create change, they must adhere to compliance measures and existing regulations including but not limited to anti-money laundering laws and securities laws. Even at that, we can expect that new and improved legal systems that do not defeat the purpose of traditional legal systems will emerge. Legal Challenges and Solutions

DAOs face certain legal challenges and the most consistent ones are captured within the following questions: Who bears responsibility when an illegal or fraudulent activity is traced to a DAO? What measures should be taken when an organization without clear legal entities suffers a security breach? How can a DAO, which operates across borders, ensure compliance with tax, securities and financial regulations? What happens when there is a code exploit (with the smart contract)? How can we ensure fairness and transparency in resolving disputes within the DAO?

Shaid Jamal, Fintech Crypto Lawyer, lists Liability issues, Code Vulnerabilities and Exploits, Dispute Resolution and Regulatory appliances as some legal challenges that Decentralized Autonomous Organizations face. The lack of a legal entity in a DAO poses a challenge when there is a need for anyone to take responsibility. It is possible that members of the community, the founder or even the developers may have to bear this responsibility, however, there are legal and jurisdictional circumstances to consider and this may mean that the issues will not be handled in the traditional manner that legal frameworks are fine tuned for. Pertaining to security breaches, one can argue that as it was with the DAO hack of 2016, we can expect that funds within the DAO would be secure, can be recovered or halted in the case of theft. However, if issues are consistently solved in a “DAO '' way, without leaving room for traditional means, there may be no avenue for existing legal frameworks and this will alienate the DAO and the general idea of decentralization as a whole. If there are legal frameworks within a DAO that accommodate investigations and collaborations with legal experts, security breaches may come to a stop. Collaborations between traditionally trained legal professionals and professionals within the DAO space may help with the implementation of compliance procedures and in that way, lead to the establishment of clearly set governance structures that accommodate existing laws and legal stances across different jurisdictions without breaking apart the decentralized nature of DAOs. This will also ensure transparency in resolving disputes within the DAO ecosystem. Decentralized autonomous organizations (DAOs), operate without borders - even legally - because they are not fixed to any jurisdiction in particular. They function autonomously in a decentralized manner through the systems they have set in place. However, no system works in isolation and thus, various challenges as discussed earlier have sprung up overtime.

These are some proffered solutions within the DAO ecosystem:

Exploration of decentralized legal services: A couple of projects have begun to attempt to leverage blockchain technology & smart contracts with the aim of providing decentralized legal services. Projects such as Aragon court (a dispute resolution protocol that resolves disputes within the DAO ecosystem through voting) and OpenLaw (a protocol that enables the creation of self executing real world contracts enabled to automatically create, manage and enforce terms of legal agreement) Others include DaoStack and Kleros. These projects seek to provide legal advice, dispute resolution mechanisms and push for expansion of legal boundaries for Decentralized Autonomous Organizations in such a way that the goals of any DAO is achieved without the need to break apart the very essence of DAOs which is transparency and trust.

Legal Structuring: To ensure that DAOs have a level of protection, it is not uncommon to form legal structures such as foundations or cooperatives to help in the process of negotiations and collaborations with representatives of traditional legal systems.

Smart Contract Audits: Within the DAO, trust is of utmost importance and the integrity and security of smart contracts must not be tampered with. To avoid disputes which will eventually require legal assistance (which the DAO ecosystem is not yet fully equipped for), audits by specialized firms must be carried out consistently. The purpose is to identify potential vulnerabilities and ensure the safety of every form of agreement (in whatever way it is represented in the smart contract).

Regulatory compliance: This almost works in the same manner as collaborations but DAOs must comply with regulations (especially those are based on laws within certain jurisdictions) in order to operate without encountering problems with the law. They may need to collaborate with existing traditional legal entities to ensure that they are on track with compliance pertaining to taxes, anti-money laundering laws and other legal requirements.

Jurisdictional Variations DAOs are “everywhere”. Members operate from different parts of the world without the need for a centralized authority. They are decentralized, leaning on the blockchain technology; and this has been one of its most astounding selling points. However, there can be a downside to it - DAOs cannot entirely stay above existing legal systems. Since one legal system cannot apply to every country, there has to be a way for DAOs to meet halfway with jurisdictional variations in such a way that the uniqueness of a DAO is not lost and they can still align with traditional legal frameworks.

Within the DAO ecosystem, some factors contribute to jurisdictional variations: Regulatory approaches Legal enforcements Requirements for compliance Law reforms and adaptability