INTRODUCTION
In a world that is speeding towards higher technological advancements, Decentralised Autonomous Organisations (DAOs) are a revolutionary concept that transforms traditional organizational governance structure. These DAOs function without any centralized control, enabling a collective decision-making process that is both transparent and democratic. With these entities gaining traction, India finds itself grappling with the need to regulate these novel constructs within the existing legal framework. The existing legal ambiguities pose significant challenges not just in the management of DAOs but also in the progressivity of their future.
UNDERSTANDING DAOs
DAOs are self-operating entities based on blockchain technology, executed through smart contracts. It does not have a central authority, and governance and decision-making processes are distributed among its members. Unlike traditional structures, DAOs rely on consensus mechanisms and predefined rules encoded in blockchain technology. The Ethereum blockchain gave us the first real implementation in the form of “The DAO”, launched in 2016. Since then, they have gained traction in several spheres of the digital world, be it for financial uses or artistic uses. The significance of DAOs lies in their transparency, inclusivity and accountability, which are attractive to people of all democracies.
LEGAL HURDLES TO DAOs
Alongside the opportunities, the rapid evolution of DAOs has presented us with significant legal challenges in the regulatory domain. The existing Indian legal system is targeted at the traditional structures with identifiable leadership. As such, they are not equipped to deal with the challenges posed by the DAOs. A primary issue is the lack of centralized, identifiable leadership. With no clear entity or individual who can be held responsible for their actions, it becomes difficult to determine their liability. Moreover, the question of legal personhood is yet to be settled. With the absence of any central authority, the question arises whether DAOs can be considered as a legal person under law and whether they can be conferred with all the rights and duties associated with same.
Another major issue is the determination of jurisdiction. Since DAOs operate on a global network transcending geographical boundaries, they may not have a distinct physical location. This complicates dispute resolution and raises questions on the applicable laws. Ensuring compliance with existing regulations such as Know Your Customer (KYC) and Anti-Money Laundering (AML) norms also become a challenge, considering its decentralized set up. Their decentralized nature also complicates taxation and enforcement. Further, the absence of clear legal guidelines on the regulation of DAOs leaves them vulnerable to legal ambiguities which could result not just in uncertainty but also pave the way for exploitation.
INDIA’S LEGAL LANDSCAPE
The current Indian laws were not formulated with DAOs in mind. However, they have portentous implications for DAO operations and can be applied with certain limitations:
- The Information Technology Act, 2000: While the act governs online transactions and electronic contracts, it remains silent on its application to DAOs. The enforceability and implications of smart contracts remain ambiguous.
- Indian Contract Act, 1872: The Act lays down the basic elements of a contract. However, not all aspects of it may be extended to smart contracts as it raises questions pertaining to consideration, legality of object, etc.
- The Companies Act, 2013: The act provides for conventional organizational structures. The traditional requirements laid down in the act fails to address the decentralization-centric DAOs. However, certain aspects of DAO operations could potentially be regulated by adapting provisions aimed at limited liability partnerships.
- Securities Laws (SEBI Act and Regulations): The activities of DAOs are most akin to securities trading and can be covered under its jurisdiction. Nevertheless, the current regulations are not tailored to suit the requirements of a DAO and hence, remain ambiguous in their applicability.
- Other Laws: DAOs may further be subjected to the limitations of other acts such as the Digital Personal Data Protection Act, 2023, FEMA Act, 1999, and other cyber privacy laws. Yet, the application remains unclear.
The absence of a specific legal framework dedicated towards the regulation of DAOs sticks out like a sore thumb. Immediate reforms are necessary to ensure accountability and consumer protection.
THE GLOBAL APPROACH
While India lags behind in its attention to the legal implications of technological advancements, other countries have taken steps to inculcate DAOs with a legal code. For example, the state of Vermont in USA was the first to pass a legislation in 2018 to regulate Blockchain Based Limited Liability Companies (BBLLC). This was followed the state of Wyoming, which passed a legislation in 2021 recognising DAOs as a type of Limited Liability Corporation (LLC) for the first time. This was followed by the state of Utah enacting the DAO Act in 2023, inspired by the DAO Model Law given by the Coala thinktank.
Similarly, Malta and Estonia have embraced blockchain technology, with laws aimed at DAOs. Switzerland has also issued certain guidelines on the regulatory treatment of various tokens, which may be extended to DAOs. Further, they may also be recognized under Swiss Private International Law Act, 1987. The laws adopted by these countries could serve as a guiding light for India to formulate its own.
THE PATH AHEAD
The importance of participative governance to ensure accountability and mitigate potential harms has been stressed time and time again. As such, stakeholders must advocate for a comprehensive legal framework that adequately addresses the legal lacunae associated with DAOs is crucial. Additionally, a regulatory sandbox could be implemented under the supervision of the RBI or SEBI to allow controlled experimentation with DAOs, fostering innovation while managing risks.
Amending the existing laws to clarify existing ambiguities and to bring DAOs under its umbrella could be short-term goals aimed at immediate legal recognition for DAOs. This may also involve adding a new category under the Companies Act or the Limited Liability Partnership Act. Additionally, industry-led self-regulation could offer flexible approach to DAO governance. A self-regulatory organization comprising of industry stakeholders could be established to develop best practices and standards for DAO operations, working in conjunction with regulatory bodies.
CONCLUSION
The emergence of Decentralised Autonomous Organisations prepresents a paradigm shift in organizational structures, offering unprecedented levels of transparency and community governance. As India envisions itself as a global leader,it is imperative to develop a robust legal framework equipped to deal with current and any future technological advancements.
By adopting a balanced approach that fosters innovation while ensuring adequate safeguards, India can create an environment conducive to the growth of DAOs. This would not only attract global talent and investment but also position the country at the forefront of the Web3 revolution.
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