Insights

Last week, Max Ganado, Consultant at Ganado Advocates, attended the AIBC Europe conference and participated in a panel discussion on DAOs (Decentralised Autonomous Organisations). The event was organised between the 13^th and 17^th of November in Malta.

During this discussion, Max addressed the legal challenges DAOs pose to legal systems. Max led a drafting project in 2020 on the establishment of DAOs and their regulation under Maltese law with several other colleagues from the Malta Digital Innovation Authority, aimed at providing DAOs with legal personality upon registration in Malta. The main challenge was to find a legal model for an organisation which is decentralised and autonomous, which does not exist in any legal system to date. The proposal was to match the legal form of organisation and its governance to the software and not the other way round, as is happening in limited legislative projects in other locations.

The difficulties are numerous, but the solution is important as its resolves many technical issues and creates certainty on matters such as the law applicable to the organisation, the jurisdiction of the courts on matters which arise, the rules of liability of persons involved and so on.  If registered in Malta, Maltese law would apply. A DAO in only software form deployed on the internet is not anchored to any legal system and many laws can apply to it based on the impacts (location) of its activities but that is highly uncertain and unpredictable.

He also dealt with the challenge of governance which traditionally is vested in human administrators. To date, there is no software (he is aware of) which can carry out all governance and so some human intervention will be necessary. This could be human administrators filling the gaps where the software does not cater for governance focus or voting systems among token holders of different types and on different topics. However, the ultimate need of a human administrator will, in his view, always remain present to deal with malfunctions of the software and ensure compliance with laws which change, should the algorithms not be able to update themselves, while also addressing loss contexts or breaches of law. This model already exists in Maltese law, in the Innovative Technology Arrangements and Services Act (Chapter 592, Laws of Malta), which was enacted in 2018, and can be extended to an arrangement which is transferred into a new organisation called a DAO. Such a “technical administrator” will work equally effectively there as a point of last resort.

On being asked what he feels about regulation of DAOs, his view was unequivocal: apart from the need to regulate their activity if relevant, such as banking, payment or investment services as we see in the new EU MiCA (Markets in Crypto Assets) Regulation, these new organisations should be regulated to qualify for registration and deployment as it is too easy to call any organisation a DAO when it isn’t one. Furthermore, the need for review and quality assessment of the governance software will ensure integrity which is critical. On registration, we will have a legal person with a software artefact as the main driver – using a blockchain register – on which all the data and assets of multiple persons are going to be recorded and held. We do not only have privacy issues but much more to protect once a DAO is launched under our legal system.