DAO Regulation: Legal Considerations for Decentralised Autonomous Organisations

What Is A DAO and Can It Be Regulated?

Decentralized Autonomous Organizations (DAOs) are redefining what it means to coordinate people and resources in the digitized world. 

In 2023, there were already around 13,000 DAOs worldwide, with a combined treasury of $23 billion. But DAOs have challenges. One major hurdle? DAO regulation. 

Right now, DAO legal issues are gaining more attention. Without a formal legal status, these organizations are very different from traditional businesses and non-profits. It’s difficult to know who’s responsible when something goes wrong, and how networks of stakeholders should be governed. 

So, what is a DAO, how does it work, and what could regulation look like going forward?

Understanding DAOs: Definition and Core Principles

A DAO (Decentralized Autonomous Organization) is a digital entity that uses blockchain technology to align people and resources. There’s no central person in charge of a DAO or a traditional board of directors. The system is run collectively by crypto token holders and governed by rules written in computer code. 

The rules of a DAO are usually coded into smart contracts on a blockchain, which means actions are executed automatically (and clearly) on-chain. 

DAOs differ in focus and purpose, but they share common characteristics:

1. Decentralization: Power is shared among participants, with decisions made through community voting (usually with tokens)

2. Autonomy: Smart contracts, self-executing agreements encoded on the blockchain, carry out the DAO’s rules without external enforcement.

3. Transparency: Every vote, transaction, and rule change is recorded publicly on-chain. 

4. Token Governance: Governance tokens act like voting shares. The more tokens you hold, the more influence you have (though some DAOs experiment with quadratic voting and other models).

DAOs represent a massive shift in how organizations coordinate. They allow users to pool resources and make decisions democratically, without one person or group holding all the power.

There are various well-known examples out there. The ConstitutionDAO experiment in 2021 brought over 17,000 people together to bid on an original copy of the US Constitution (raising $42 million). Uniswap, the decentralized currency exchange (DEX), is another successful example of a DAO in action- anyone can become a member with a UNI token and gain voting rights.

dOrg made an impact as one of the first DAOs to legally register as a U.S. LLC in Vermont. It functions as a developer collective and demonstrates how DAO structures can be legally recognized, with the right framework.

The Challenges with DAO Regulation

DAOs are exciting. But without rules and accountability, they can also be risky. Decentralized Autonomous Organization regulation is tricky because DAOs still exist in a legal gray area. Most jurisdictions don’t have clear laws that define or recognize them.

The first and biggest problem? Legal personality. Without it, a DAO isn’t treated like a corporation or even a partnership. That means:

• It can’t sign contracts.

• It can’t own property.

• It can’t be sued, or sued in most courts.

This lack of status complicates everything from taxation to liability. If a DAO causes harm or breaks a law, who’s held responsible? The developers? Token holders? Nobody?

There are other issues too, such as:

Jurisdictional Confusion

DAOs are global by design. Many examples, like the Decentraland virtual world (governed by a DAO), allow anyone to get involved, regardless of their location. That’s great from an accessibility perspective. But different countries have different laws, which means jurisdictional ambiguity starts to grow. Regulators don’t always know which laws apply to which organizations.

For instance, if a DAO governed by anonymous wallets launches a lending protocol that fails and harms users, which country prosecutes? And under what legal theory?

The Anonymity Problem

While pseudonymity protects user privacy, it creates a major hurdle for enforcement. Many DAOs have no identifiable leadership. That means when something goes wrong, like with the infamous 2016 “The DAO” hack, authorities often can’t figure out who to hold accountable.

Real-World Implications

Regulators are understandably confused. Groups like the US Securities and Exchange Commission (SEC) have tried to address issues with DAO in the past. For example, the SEC concluded that “The DAO” was offering securities without registration. That meant it was potentially vulnerable to repercussions set by existing laws. 

But since there’s no specific DAO legal framework, even enforcing a policy is difficult. Just because a regulator launches an investigation doesn’t mean they’ll know which penalties to apply, or how to use them. 

The Various Attempts at DAO Regulation 

With no unified global approach, countries are responding to the rise of DAOs in very different ways. Some have taken early steps to recognize and regulate these digital-native entities. Others remain cautious or silent. For instance:

In the United States

As mentioned above, the US SEC has suggested, in the past, that DAO-issued tokens might be classified as securities. If tokens were to meet the Howey Test criteria, they would potentially be subject to federal securities laws. This means DAOs might face legal consequences if they raise capital without proper registration.

Some states have taken a more innovative approach. Wyoming recently became one of the first US states to legally recognize DAOs. Initially, Wyoming allowed DAOs to be registered as a type of LLC. In 2024, Governor Mark Gordon also introduced the legal status of “decentralized unincorporated nonprofit associations”. 

This innovation is significant. Wyoming’s legislation makes it easier for DAOs to operate within a traditional legal structure. It helps blend blockchain governance with legal recognition. Utah also passed a DAO Act in 2023, which recognizes DAOs as a specific legal entity. 

In the European Union

The European Union is adapting quickly to the rise of digital assets across countries. The MiCA (Markets in Crypto-Assets) regulation already introduces guidelines for how digital assets, stablecoins, and service providers should be governed. 

Currently, though, the MiCA guidelines don’t cover specific rules for DAOs, dApps, and DeFi systems that are considered fully decentralized. Legal experts in the EU are increasingly exploring ways to address DAO legal issues, but there’s no clear framework yet.

DAO Regulation Elsewhere

Elsewhere around the world, regulatory guidelines are diverse. Switzerland, for instance, is earning a reputation as a hub of blockchain innovation. 

The “Crypto Valley” in Zug is already home to various blockchain projects, operating under the Swiss DLT Act. The DLT Act allows tokenized securities, digital governance models, and experimentation with new organizational forms.

In Singapore, regulators are taking a measured approach to exploring decentralized autonomous organization regulation. The country’s regulatory sandbox framework enables experimentation under controlled conditions, perfect for DAOs testing legal models without risking full compliance violations. This model encourages innovation while providing safeguards for users and regulators. 

Potential Regulatory Models and Their Implications

There are a few different approaches that could be taken with DAO regulation, all with specific challenges and potential benefits. 

Option 1: Legal Incorporation Models

One approach gaining traction is the formal incorporation of DAOs as legal entities, such as LLCs, foundations, or cooperatives. By choosing this path, DAOs gain:

• Limited liability for members.

• Access to banking and contracts.

• Clear tax status.

dOrg, a developer DAO, was among the first to take this route in Vermont. The upside? Legal clarity. The downside? It introduces centralized points of contact, which can compromise a DAO’s decentralized identity.

Option 2: Voluntary Self-Governance

Some DAOs are opting to proactively implement legal best practices without being legally required to. This includes:

• Publishing transparent governance documents.

• Conducting external audits of smart contracts.

• Using identity-verified voting for high-stakes decisions.

These steps won’t replace a formal legal DAO status, but they may improve trust and reduce regulatory risk.

Option 3: Hybrid Models

Hybrid models blend the structure of a traditional legal wrapper with the flexibility of on-chain governance. For instance:

• The DAO operates as a legal foundation, but all treasury decisions are executed via smart contracts.

• A DAO forms an LLC solely for regulatory interface (e.g., tax filings), while day-to-day decisions remain decentralized.

These models aim to strike a balance between innovation and compliance, particularly appealing in countries like the U.S. or Switzerland, where the legal system values identifiable legal entities.

The Issues with DAO Regulation 

No matter which model a DAO chooses, there are trade-offs. Adding legal structure may improve legitimacy and unlock services (like banking), but it could also:

• Introduce bureaucracy.

• Create regulatory overhead.

• Undermine decentralization if leadership becomes concentrated.

Moreover, there's a deeper philosophical concern. Many DAO founders see their work as a break from legacy systems. Adopting traditional models may feel like a step backward — even if it's a practical necessity.

Still, some level of regulation is inevitable. The goal is to find a DAO legal framework that preserves autonomy while providing enough clarity to operate safely and effectively across borders.

Combining Innovation and Regulation: The Age of DAOs

We’re at the beginning of a tricky turning point in entity management. DAOs represent a big change in how humans collaborate, govern, and build together, without traditional hierarchies. 

The promise of transparency, community-led decision making, and borderless cooperation, powered by blockchain technology, is compelling. But this innovation does create issues with established systems of law and governance. 

Without legal status or clear accountability, DAOs can operate in a vacuum, one where responsibility is diffused, and enforcement is murky. DAO legal issues range from jurisdictional ambiguity and participant anonymity to questions of liability and ownership. These aren’t minor hurdles; they are foundational challenges that affect everything from day-to-day operations to existential risk.

Governments and regulators, from Wyoming to Switzerland, are actively testing ways to accommodate DAOs within existing legal structures or build entirely new ones. But there’s still a way to go. Until a globally accepted DAO legal framework emerges, participating in or launching a DAO means embracing some legal uncertainty.

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