Written by: Xiao Sa lawyer

In February 2023, Utah issued the latest DAO regulatory bill. Compared with the 2021 Wyoming DAO bill, the new law goes a step further in terms of legal person qualifications and limited liability. The main highlights are as follows:

Utah DAO Bill Highlights Overview

1. The bill gives DAOs a unique, new form of legal recognition. Utah decided not to adopt Wyoming’s “old wine in new bottles” regulatory approach to regulate DAOs using the limited liability company (LLC) model, but to clearly distinguish DAOs from LLCs, creating a new legal entity for DAOs with groundbreaking legislative thinking;

2. The bill clarifies that DAO organizations are limited liability organizations, resolving the dispute in the 2022 U.S. Commodity Futures Trading Commission (CFTC) v. bZx DAO (later renamed Ooki DAO) case over whether DAO members need to bear unlimited joint and several liability with their personal assets;

3. Established a tax system for DAO;

4. Make it clear that DAO participants have no implied fiduciary duties unless it is expressly stated that these obligations apply to participants;

5. Protect the anonymity of DAO participants;

6. Incorporate “technical gatekeeping” measures to ensure that the DAO is, in fact, a DAO.

1. Overview of the Utah DAO Act

The Sajie team has already made a systematic introduction to what DAO is. Interested partners can refer to: "Original | DAO, will it be a new type of "company" in the future? "We will not go into details today. As a new type of business entity that has just emerged in recent years, DAO is obviously different from the existing business structure in many aspects such as personnel composition, operation management, profit distribution and taxation. Therefore, there has always been controversy over the legal nature and regulatory measures of DAO. Although many countries have already had many real cases of DAO, these DAOs are still in a state of "new wine in old bottles" in terms of regulatory measures and legal nature. This situation is mainly due to the fact that Wyoming set a precedent in the DAO Act issued in 2021: analogy regulation of DAO with LLC, which is similar to the real world and has already developed and matured, and even allowed Wyoming's DAO and LLC to be converted into each other. In other words, under this regulatory approach, DAO is LLC, and LLC is DAO.

To be honest, when faced with new technologies, regulating by analogy with old things is the most common strategy, but in essence it is also an inevitable compromise for legislatures and regulatory agencies: although analogical regulation can solve urgent problems, it ignores the uniqueness of emerging things themselves and is not conducive to long-term development.

Therefore, after careful consideration and heated discussions, Utah has taken a big step in the field of virtual asset regulation, expressing its sincerity in embracing virtual assets through practical legislative actions: the "Utah Decentralized Autonomous Organizations" Act ("Utah DAO Act" for short). Many contents of this bill largely refer to the DAO Model Law template proposed by the crypto community COALA. Therefore, the Utah Act has made some very "innovative" provisions on the legal person status and limited liability of DAO.

2. Wyoming VS Utah, what are the similarities and differences in DAO regulation?

For most people who are not familiar with the United States, Wyoming and Utah have a very low presence. There are no big cities or world-renowned universities, and even few famous local specialties. In addition to their popularity, Wyoming and Utah have many similarities: they both have beautiful scenery and rich mineral resources, but their economic development is relatively backward; they both rely on agriculture (animal husbandry) and mineral processing as their main pillar industries; they both have vast land but sparse population; they both have a positive attitude towards the virtual asset industry...

In terms of DAO regulation, Wyoming and Utah also introduced relevant bills one after another. The answer to Wyoming has been introduced by the Sister Sa team (for details, see: "Original | Will DAO be a new type of "company" in the future?" and "Sister Sa Team | Can DAO operate legally in China?"). Today, based on the comparison, we will talk to you about Utah's innovation.

In general, Wyoming's DAO Act is relatively rough, and does not make provisions for many technical features of DAO, but simply uses LLC as a reference for analogy regulation; while Utah's DAO Act is more detailed, not only tentatively giving its own answer to the long-standing problem of taxing virtual assets, but also making provisions for technologies such as hard forks. However, although Wyoming is lazy, its DAO Act is more down-to-earth and highly compatible with the existing business system. Utah's DAO Act is full of idealism, but the actual implementation effect is difficult for the Sajie team to predict.

3. Utah DAO Bill, compromise or tolerance?

The Sajie team believes that although Utah’s DAO Act provides a newer and more forward-looking regulatory framework for practitioners in the virtual asset industry, there are also many practical problems that need to be resolved.

The first is the enforceability of the bill. The overly novel legal personality innovation and limited liability provisions may not have sufficient normative supply under the current corporate law system in the United States, and the law enforcement agencies may not have the regulatory capabilities required by the bill. In layman's terms, the lofty ideals of the Utah DAO Act are difficult to find a fulcrum in the real world. This is because the overly cutting-edge institutional innovation does not match the existing business rules in the United States, which may undermine an already formed and relatively stable rule system. At present, this contradiction has gradually arisen. On the one hand, the tax provisions of the Utah DAO Act are different from previous practices and have certain differences with the federal tax system. How to resolve tax contradictions and create a tax calculation and taxation rule applicable to virtual assets and DAO organizations is a key point to consider in the future; on the other hand, as a state with traditional animal husbandry and manufacturing as its pillar industries, Utah itself lacks experience in financial and commercial supervision, and the relevant law enforcement agencies lack the relevant regulatory enforcement capabilities required by the bill.

Secondly, the bill introduced by Utah after referring to the Wyoming DAO Act and the COALA Model Act was too hasty and lacked relevant normative practices. Although the bill highlights the characteristics of blockchain technology in specific provisions and makes seemingly operational provisions on hard forks, blockchain upgrades, etc., whether it is actually feasible remains to be investigated. At present, countries and regions around the world have chosen to postpone legislation on emerging things such as NFTs and DAOs, not because of a lack of relevant legislative experience or technology, but because these emerging things are still in a period of rapid development, and overly hasty legislation is likely to improperly restrict the development of new technologies. Therefore, rather than saying that Utah's DAO Act is a "tolerance" to the crypto industry under the existing system, it is better to say that it is a "compromise" that the state is eager to achieve revitalization and development through the crypto industry.

4. Final Thoughts

If an idealized bill not only cannot solve real problems, but also has a negative impact on financial security and social stability, then it is better to return to the era of new wine in old bottles. However, we also highly appreciate the goodwill and tolerance shown by Utah in the DAO Act to the virtual asset industry, as well as the institutional innovation of letting DAOs belong to DAOs and LLCs belong to LLCs. However, human commercial systems and dispute resolution mechanisms have evolved for thousands of years and formed a set of established rules. It is very difficult to make changes in the short term. During this period, it is key for virtual asset practitioners to maintain sufficient patience and confidence.