New Hampshire Takes a Better Approach to DAOs – TradingView News

The world’s legal systems are adapting to transactions facilitated by smart contracts, cryptocurrencies, digital assets and other evolving blockchain technologies. One of these innovations – commonly known as “Decentralized Autonomous Organizations” or “DAOs” – offers potentially revolutionary mechanisms for conducting governance and transactions between participants.

Keith Ammon is a four-term elected representative in the New Hampshire State Legislature. Bill Ardinger has practiced law in NH for nearly 40 years, representing businesses on tax and transactional matters and seeking policy improvements. Both served on the New Hampshire Commission on Cryptocurrencies and Digital Assets.

New Hampshire is considering legislation (HB 645) to introduce a new legal entity law for DAOs. This essential legal innovation, recommended by the 2022 New Hampshire Commission on Cryptocurrencies and Digital Assets (on which the authors served), will not “piggyback” on other legal entity laws, such as “limited liability company” laws, as some other states have done has. Instead, it proposes a new form of legal status for DAOs listed on a public registry, including granting the company legal personality and limited liability for its participants.

Traditional centralized legal entities and true DAOs

Traditionally, legal entities such as corporations operate by delegating decision-making power from more diverse participants (eg shareholders) to centralized executive authorities (eg officers or agents) who determine and carry out entity operations.

DAOs offer a different approach. from these more traditional forms of community delegated actions. DAOs are enterprises that enable a diverse group of participants to execute transactions as a coordinated unit according to software code implemented on a public blockchain (eg smart contracts) without the need for delegations to a board, officers or other centralized managers. Once actions are approved by distributed governance, they can be executed automatically (“autonomously”) by the code without further executive action by centralized executives.

While some DAOs are subject to control by a limited group of developers or participants and still rely on the traditional model of delegated authority to centralized managers, other truly decentralized autonomous organizations represent a potentially revolutionary innovation in how governance and economic decisions are made. Blockchain technology, with its unique properties of flexibility, transparency, auditability and security, can be deployed to empower widely diverse groups of people with shared values ​​to achieve common goals on the global scale of the Internet. We remain in the very earliest stages of developing the potential for widespread DAOs to impact our societies and economies.

HB 645 expressly aims to promote this “genuine” DAO model, limiting the new corporate form only to DAOs that meet standards for diversification and transparency.

Uncertain legal status for DAO participants

While technical innovations for DAOs continue, the legal system remains entrenched in the world of traditional centralized entities. The lack of appropriate legal rules for DAOs creates uncertainty and risk that hinders innovation and undermines the ability of DAOs to operate in the traditional world.

The main legal risk is that DAO developers, administrators and participants are subject to joint and several liability for losses realized through a DAO. In contrast, shareholders of corporations (and other legal entities) enjoy “limited liability”. That is, if a corporate shareholder invests $100, the shareholder (in most cases) is only exposed to the loss of that investment due to corporate activities, and the rest of the shareholder’s assets are protected. This limited shareholder liability, first adopted by New York State for general corporations in 1811, is a legal innovation that has driven today’s Western economies.

The risk to a participant’s non-DAO assets is not academic. In September 2022, the CFTC took enforcement action against Ooki DAO, treating the DAO as similar to an unincorporated association and asserting that active members are jointly and severally liable for all the obligations, liabilities and debts of the DAO. The lack of limited liability is the death knell for robust development of DAO technologies.

Another legal uncertainty for DAOs is their lack of recognition as a “legal entity” that can transact in the traditional world. A corporation can own assets, sue in its own capacity to enforce a contract, and can be sued if it violates a law or contract. Under current laws, DAOs lack similar legal clarity. If a DAO becomes involved in transactions, it may not be able to enforce rights in court or before a regulatory authority.

Other legal uncertainties exist for DAOs (for example, securities, antitrust, taxation). However, the conceptual starting point should be to establish a legal framework that recognizes DAOs as legal entities and grants its participants limited liability.

New Hampshire’s answer: HB 645

As stated in the Final NH Commission Report, New Hampshire intends to become a leader in establishing sound and flexible rules governing the legal status of DAOs. Following the Commission’s recommendation, Representative Ammon introduced House Bill 645, which would have enacted the “New Hampshire Decentralized Organization Act.” The NH DAO Act will recognize a registered NH DAO as a distinct legal entity and provide limited liability protection to its developers, participants, administrators and legal representatives.

The initial version of HB 645, first introduced in 2023, implemented the COALA model law. This choice indicates an intention to create an entirely new legal entity that reflects the unique characteristics of DAOs instead of trying to fix an existing approach for traditionally centralized entities (as other states have done by transitioning their LLC statutes to DAOs expand). The House Commerce Committee recommended an amendment to the bill that adopts some more traditional legal entity provisions (such as name and registered agent requirements) while preserving the creative, “DAO-unique” aspects of the COALA model. On February 6, 2024, the full House voted to approve the amended bill by a bipartisan vote of 340-33. The Senate will now review the bill, with hearings before the Senate Commerce Committee during April.

Key aspects of the bill

While it is beyond the scope of this article to provide a detailed description of the bill, the following highlights are essential:

(1) Legal Personality and Limited Liability. As noted, the Act will recognize legal personality and grant limited liability to NH DAOs listed on a public NH DAO register.

(2) Public NH DOA Registry. The Act will require the Secretary of State to establish and maintain a register of NH DAOs that meet certain “list” requirements. The Act directs the Secretary of State to engage a qualified registry administrator and directs the administrator to undertake reasonable efforts to maintain the registry as a blockchain system.

(3) Registry listing requirements. The Act will require a NH DAO to meet 11 “listing” requirements. These include being deployed on a permissionless blockchain, using open source software, having public, plain language bylaws that accurately reflect the rules of the software code governing the NH DAO, providing evidence of quality assurance testing, and decentralized networks and governance have.

(4) Authorization of Agents. The Act will expressly recognize the legal positions of “administrators”, “developers”, “participants” and “legal representatives”, authorizing an NH DAO to appoint such persons to perform off-chain functions and operations on behalf of the NH DAO.

(5) Management and Economic Rights. The Act will require NH DAO bylaws to specify the rules for determining participants’ management and economic rights and responsibilities. While the bylaws must address such substantive rights, the Act emphasizes that its policy is to give maximum effect to the principle of freedom of contract and to recognize that the rights of participants will be determined by the governing software code (the “intent of code is law “).

(6) Indemnity and Waiver Powers. Similar to laws establishing other legal entities, the Act expressly empowers NH DAOs to indemnify and limit liability for participants, administrators and other persons.

(7) Flexibility. Following the COALA Model approach, the Act will allow considerable variability and flexibility in the structure of particular NH DAOs. The public registry approach seeks to take advantage of DAOs’ public, open-source nature and to avoid filing requirements typical of traditional legal entities.

New Hampshire’s motto “Live Free or Die” celebrates independence, freedom and individual rights. Our state has a well-deserved reputation for supporting innovators and entrepreneurs with flexible and modern legal systems. By attracting successful creators with sound laws, New Hampshire continues to enjoy diverse economic growth that benefits our citizens and their communities. Consistent with the recommendations of New Hampshire’s 2022 Commission, the Legislature is making significant progress in enacting a unique legal entity statute built specifically for DAOs.

The authors encourage readers to contribute to this vital effort to enact legal innovations that support the further development and growth of this critical blockchain technology.