In a recently released study, crypto legal experts suggest a solution for the potential legal issues surrounding decentralized autonomous organizations (DAOs).

In a series of Tweets, Andreessen Horowitz crypto General Counsel Miles Jennings suggested that DAOs should register asas Unincorporated Nonprofit Associations (UNA). In a summary of the study conducted with fellow crypto legal expert David Kerr, he explained the benefits registering as UNAs could have for DAOs.

DAO legal issues

In practice, DAOs are the governing bodies of blockchain-based communities, such as decentralized exchanges (DEX). Although Jennings points out their “potential to revolutionize how people organize, collaborate and coordinate,” he laments that these characteristics make most DAOs incompatible with US legal structures. 

The unique characteristics of DAOs make traditional structures, such as corporations, partnerships, LLCs and trusts, unworkable for most DAOs. These are largely incongruent with DAOs prioritizing privacy, lacking the formal legal consent of members, and their overall emphasis on decentralization. As a consequence they face liability exposure, and cannot file tax returns, pay taxes on revenue, or enter into legally binding contracts.

UNAs as a solution

However, the crypto legal experts did come across a potential solution in the form of UNAs. Defined by the Uniform Unincorporated Nonprofit Association Act (UUNAA) as “consisting of [two] or more members joined under an agreement that is oral, in a record, or implied from conduct, for one or more common, nonprofit purposes,” Jennings remarked, “sounds like a DAO to me.”

UNAs have a simple formation and flexible governance requirements that are well suited for DAOs. In many states, UNAs are legal entities separate from their members “in determining and enforcing rights, duties and liabilities in contract and tort,” that can also open bank accounts and own property. Although many DAOs would not qualify as a “non-profit,” many potentially could. 

Jennings uses the example of a Homeowners Association in regard to real estate appreciation. Just because their actions could increase the value of members’ real estate holdings doesn’t make them for-profit enterprises. Jennings argues the same could be said of DAOs in regard to their governance tokens.

By registering as a UNA, DAOs would potentially provide their members with limited liability protections and the ability to pay taxes and sign contracts with third parties. Further, Jennings suggests the US could compound the benefits DAOs offer by adopting “more flexible and permissive UNA statutes.” This, he says, could ultimately “establish the US as the DAO capital of the world.”