The Pursuit for Legislative Legitimacy: Crypto Corporations and Wyoming’s Blockchain Bill

By Ori Shimony, Research & Development Lead at dOrg, an Aragon Expert

For blockchain developers, especially those familiar with the Vermont Bill for Blockchain-Based Limited Liability Companies (BBLLC), Wyoming’s Blockchain Bill No. 38 paves the way for significant new breakthroughs for decentralized autonomous organizations (DAOs). Having passed through the Wyoming Senate Committee, if enacted, the legislation will enable DAOs to incorporate as limited liability companies. This is potentially a huge step forward for DAOs: allowing them to operate, represent assets and manage their affairs on-chain. More notably, token holders would be permitted to enter into contracts and conduct business as a single unit, realizing one of Ethereum’s core visions.

Decentralized governance solutions are becoming increasingly popular in decentralized finance (DeFi), given their strategic advantages over traditional institutions. DAOs constitute the next transformative phase in business, enabling anyone within an organization to introduce ideas to be appraised by their peers, relying on blockchain technology for security and automation to reduce cost.

Other seminal developments have added fuel to the fire, with Robinhood’s halt on GME and AMC stocks in January presenting a case for DeFi. The Securities Exchange Commission (SEC) vs. Ripple pretrial hearing that took place in February 2021 has also caused a stir. Now, having passed through Wyoming’s legislature, the Bill seeks to properly define a legal landscape for a new wave of crypto corporations. While the net effects have been debated, we may be moving a step closer to clarifying the question proposed in the Mattereum Whitepaper: What if code really did have the force of law behind it?

Where do we begin?

Blockchain and crypto can feel unconquerable to those of us immersed in the industry, but we are only starting to emerge from the very early stages of the market’s inception. There have been eye-popping figures coming out of the latest non-fungible token (NFT) frenzy, amid an ongoing bull market, with many businesses flourishing in the crypto markets. Despite this heavy investment in a variety of networks and their native products, building out and managing blockchain projects is still quite novel.

While the room for growth is virtually limitless, decentralized finance remains a drop in the ocean when compared with traditional global finance. If the goal is to democratize commerce using distributed technologies, it is absolutely imperative that any new legislation is constructed thoughtfully so as not to stifle innovation. A huge concern in this regard is that legislators will fail to appreciate the intricacies of decentralized governance and regulate based on an overly simplistic model.

Wyoming’s Blockchain Bill

The law imposes distinct duties on both individuals and corporate legal entities. Traditionally, if you want to do business with anyone, then you want the legal personality that the “corporate shield” bestows. One of the limitations currently facing decentralized autonomous organizations (DAOs) is the lack of any legal assurances that protect any one person from being held personally liable for the actions of the company.

Granting the corporate veil could provide much needed assurances for innovators in the civic and private sectors who utilize smart contracts to coordinate, providing protections to crypto entrepreneurs and communities that will allow them to innovate on stronger footing. It’s the legal yin to the crypto yang. Until this type of crypto-friendly legislation becomes widespread, however, DAOs and Crypto Networks will be locked out of the broader global economy.

On the other hand, Wyoming’s Blockchain Bill mainly deals with the questions of legal personality and limited liability. There are several other thorny questions in the broader legal nexus that have yet to be dealt with, namely real property, privacy, arbitration, taxation, and securities law. While the corporate shield is an important step, these are but a few examples of areas that are hampering innovation in decentralized communities today.

Furthermore, no straightforward definition is provided for a DAO, or the concept of “algorithmic governance” that the law references. In the section on voting, the Bill lays out restrictively specific rules for assigning membership interests: either purely financially-based or exactly equal. This disregards years of research and experimentation into alternative decision-making algorithms like quadratic voting and reputation-based governance.

We must remember that this Bill merely represents company formation, and like a lot of legislation, will be subject to revisions and amendments. Ultimately many of the most important issues will need to be decided by federal regulators, through case law in the courts and a developing body of jurisprudence.

Practicing Pragmatism

It’s easy to analogize DAOs to corporations, but this only scratches the surface of what they can become. Decentralized autonomous governance technologies could be applied to use cases as diverse as political action committees, universities, municipalities and virtually any other traditional institution. They also have the potential to unleash a wave of digitally-native entities like data unions and platform co-ops.

Similarly, legitimate use cases demonstrating the utility of decentralized governance solutions have been emerging recently. Europe’s biggest cultural organization, Omnium, recently deployed decentralized voting technologies for the third year in a row at its annual general meetings, exhibiting the largest blockchain voting use case in history. The same decentralized voting solutions have been used successfully in a digital voting pilot project that ran alongside the Catalan regional elections in February.

Use cases such as these present a springboard for blockchain projects to gain traction. But they must be underpinned by a pragmatic approach, grounded in the limitations of blockchain as they exist within the contemporary economic and regulatory paradigm. The Aragon Project, by facilitating community-based decision making, data provenance and efficient cost, provides the operational base layer for more than 1,600 DAOs. In a market worth $800 million on DeepDAO at the time of writing, this legitimizes the assertion that DAOs are changing the world.

Stay Informed

If regulations merely treat DAOs as a more efficient and more transparent counterpart to traditional corporations, they might impose laws that constrain more novel use-cases outside of the corporate realm. Wyoming’s Blockchain Bill is a sophisticated document: the legislators demonstrate a deep understanding of DAOs in the bill, having consulted several developers and operators in the space. However, while representing an important step that should be applauded, the Bill is not going to affect very much on its own.

This reflects the importance of allowing legal professionals and coding architects to collaborate in an environment conducive to drafting policy on an emerging industry. It also highlights a unique, competitive opportunity for aspiring professionals to specialize in crafting smart contracts and legislation that are more closely aligned. Perhaps we will see a significant uptake in the hiring of young technologists to advise on crypto-related legal cases, and towards legitimizing DAOs.

DAOs have yet to receive legal recognition, and that is why Wyoming’s Blockchain Bill and Vermont’s BBLLC are so significant. Rather than forcing this nuanced method of corporate governance into the contemporary model, we should be affording collective digital entities — DAOs — the same legal guarantees enjoyed by traditional organisations.

Crypto corporations should be recognized as hybridized entities, governed by their own set of bespoke rules and protections. Only then can DAOs begin to realize their full potential in the global marketplace, with their unique advantages in secure and transparent recordkeeping, autonomous execution, and borderless participation to truly democratize governance.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.