The US state of Utah has passed a bill/law granting legal recognition and limited liability protection to decentralized autonomous organizations (DAOs).
Decentralized Autonomous Organizations (DAOs) are blockchain-based organizations that operate using smart contracts and are managed through democratic voting systems. They have recently gained popularity as a new way of organizing businesses, social networks, and other communities.
The “Utah Decentralized Autonomous Organizations” Act (Utah DAO Act) defines the DAO ownership/participant base, incorporates a gatekeeping technology function, introduces quality assurance requirements for DAO protocols, and establishes a precise tax treatment consistent with current DAO functionalities.
The Utah DAO Act also provides legal recognition and limited liability to DAOs and legally frames them as “Utah LLDs.” The Act defines ownership of DAOs and protects DAO-compliant anonymity through bylaws, introduces quality assurance DAO protocols, and aims to allow utmost flexibility for innovation. Besides Utah, the US state of New Hampshire could have similar legislation already this year.
Currently, DAOs operate in a legal gray area, as most jurisdictions worldwide do not recognize them as legal entities. This lack of legal recognition makes it difficult for DAOs to enter into contracts, hold assets, and conduct other business activities that require legal recognition.
The Utah DAO Act defines ownership of DAOs and protects DAO-compliant anonymity through bylaws. It also introduces quality assurance DAO protocols to ensure clear nuances in tax treatment and updated DAO functionalities. The Republic of the Marshall Islands approved similar legislation last year, identifying DAOs as limited liability companies and ensuring formal DAO structure adoption in the state’s legal units.
At the same time, there are still some political concerns about the full anonymity of the DAO base and the original tax language. The “blockchain” task force responsible for the bill made a compromise proposal requiring each DAO to have a disclosed incorporator while allowing the participant base to remain anonymous. The Task Force will continue to work closely with the Utah Department of Commerce to prepare for administrative onboarding and explore any weaknesses in the legislation. The bill will take effect in January 2024.