Wyoming is a pioneer in the cryptocurrency space. With its investment in the new form of currency, the state legislature has passed new laws for how cryptocurrency companies and other digital organizations operate within the state. As a result, cryptocurrency companies and other digital organizations, known as Decentralized Autonomous Organizations, or DAOs, can operate without human intervention or the control of individuals or government. In other words, Wyoming DAOs, and DAOs in general, sometimes run entirely through algorithms without any human input.
Wyoming law recently became the first state to allow DAOs to register and operate in the state as limited liability companies, thus granting DAOs many of the same legal rights and protections as those enjoyed by traditional business entities. This article discusses the new DAO laws in Wyoming.
How Does the DAO Work?
Understanding DAOs requires a comparison of traditional businesses. In conventional companies, the hierarchy flows from the top down. First, the company’s executives decide how to run the company. They then delegate those decisions to managers, who send directives to the non-executive employees to implement the executives’ instructions.
By contrast, DAOs use smart contract technology to streamline governance. DAOs do this by granting all members of the DAO the opportunity to steer the organization. They do this by offering proposals to the membership as a whole.
The Use of Smart Contracts and Blockchain
In other words, through smart contracts, DAOs automatically execute actions without human approval when certain conditions are met. For example, Wyoming law defines a smart contract as an automated transaction using code on a blockchain to execute the terms of an agreement based on the occurrence (or non-occurrence) of specific conditions.
DAOs operate on blockchains, which are transactions that occur across a widely distributed network. The virtual currency uses a blockchain ledger, the electronic record of all of the transactions on the blockchain.
Who is a stakeholder?
The stakeholders in DAOs include anyone who owns a crypto token tied to the DAO. Stakeholders vote through specialized cryptocurrency tokens. For example, after a member makes a proposal, all members vote on the proposal, usually through a token system. The weight of a member’s vote depends on the number of governance tokens the member owns.
For example, suppose people create a DAO to try to eliminate greenhouse gases. One member of the DAO could propose that the DAO use a certain amount of its funds towards wind turbine research. The DAO members then all vote on the proposal. Many people like DAO’s features because of this decentralized voting structure and because it’s a safe way to collaborate with strangers while raising funds for a specific cause.
Has the law previously considered Wyoming DAOs as legal entities?
Because of the unusual structure of DAOs, these business entities have faced challenges when seeking recognition as legal entities. For example, DAOs did not have the legal rights of other recognized business entities, such as corporations, partnerships, and limited liability companies.
People have been reluctant to form DAOs because of the relative lack of legal protections. However, Wyoming has recently become the first state to provide specific legal protections to DAOs by allowing them to operate in the state as limited liability companies.
Wyoming Senate Bill 38
Wyoming’s Senate Bill 38 was initially proposed in January 2021 and sent to the Wyoming Senate’s Joint Corporation, Elections, and Political Subdivisions Committee.
Wyoming Senate Bill 38, titled Decentralized Autonomous Organizations Supplement, gives Wyoming DAOs protected legal status and allows them to incorporate as limited liability companies under Wyoming’s Limited Liability Act. The legislature passed the bill in July 2021.
The law recognizes a traditional LLC is a business entity distinct from the individual members. When you form an LLC in a particular state, such as Wyoming, the LLC must operate under the laws of that state. LLC members generally enjoy protection from lawsuits against them individually. In other words, LLC members aren’t personally liable for the LLC’s debts or legal liabilities.
Another feature of an LLC is that, unlike certain corporations, taxation only occurs on the individual level, so there is no so-called double taxation. Finally, operating an LLC is generally less costly and less complicated than other corporate entities.
How does Senate Bill 38 affect Wyoming DAOs?
Wyoming’s new law allowing Wyoming DAOs to incorporate as LLCs means that Wyoming’s laws must recognize these business structures as legal business entities. Thus, they are subject to the obligations and privileges of other LLCs. In other words, the bill allows Wyoming DAOs to enter into legal contracts that will be enforceable under Wyoming law.
In March 2022, the Wyoming legislature amended specific statutory provisions regulating DAOs. One of these provisions addresses the minimum number of votes required to pass a proposal. In a traditional corporation, stakeholders vote through a quorum system, which means the business must receive a certain number of votes before taking a proposed action. However, with Wyoming DAOs, Wyoming was concerned that requiring at least half of the Wyoming DAO’s membership to vote could hamper innovation.
Authority to Define Quorum
Therefore, the new Wyoming law allows Wyoming DAOs to determine their definition of a quorum within their articles of incorporation. This will significantly benefit the DAOs ability to implement changes and improvements, particularly ones with large memberships. For example, if a DAO only has ten members, it may not be difficult to vote on and implement proposals. However, if the DAO has 10,000 members, gathering enough votes through a traditional corporate 50% quorum system could be difficult.
Wyoming also plans to build an application programming interface system to streamline the process of registering Wyoming DAOs.
What Are the Benefits and Downsides of Wyoming DAOs?
The new Wyoming law recognizes Wyoming DAOs as business entities that enjoy the protections and benefits of state law. In other words, under the new law, Wyoming DAOs can now enter into legally recognizable contracts and enjoy the protection of Wyoming’s laws. Specifically, since the new law gives Wyoming DAOs status as LLCs, Wyoming DAOs will now be protected from others suing them as general partnerships.
The Wyoming law is new. Therefore, many people still do not know some of the legal implications of the new DAO LLCs. The legislature passed this new law primarily to protect DAOs from general partnership treatment. If the law treated Wyoming DAOs as general partnerships, the members would be subject to personal liability. Instead, the law doesn’t address all of the issues implicated in operating DAOs.
One of the major components of business formation is ensuring that you are not held personally liable if you are ever sued. However, questions about liability remain, so you must understand the legal consequences of forming a Wyoming DAO before embarking on this entity formation.
Dissolution Consequences of Wyoming DAOs
Furthermore, the law includes provisions that may deter people from forming a DAO. For example, under the new law, a DAO LLC automatically dissolves if a proposal is not approved or if action is not taken made for one year. But, of course, if the DAOs are happy with the DAO performance, they may not want to change anything.
The automatic dissolution provision may make members install changes where they didn’t need to to keep the DAO active. In short, Wyoming may have to work out kinks and gaps in the law before Wyoming DAOs gain popularity.
Moreover, because Wyoming DAOs don’t operate as a traditional corporate entity with a regulatory framework, the federal government may scrutinize a DAO’s operations. Furthermore, the law may still consider DAO tokens as “securities,” subject to federal securities laws. As a result, there are many uncertainties in the regulations regarding DAOs, so some people may not risk using the model for their business entity.
How Do You form a Wyoming DAO?
To form a Wyoming DAO LLC, you must submit Articles of Incorporation to the Wyoming Secretary of State.
To create a DAO LLC, the Articles of Incorporation must include:
- A statement that the new entity is a DAO
- The name of the DAO LLC must have the words DAO or LAO or DAO LLC in the entity’s name
- The street address of the LLC’s registered agent and office for the agent
- A “Notice of Restriction on Duties and Transfers” stating that the DAO, underlying smart contracts, articles, and operating agreement will (or will not) include:
- Information on fiduciary
- Restrictions on ownership interests transfers, withdrawals, or resignations from the DAO
- Definitions for return of capital contributions
- Definitions for what qualifies as a dissolution of the DAO, and
- A statement that the DAO is a publicly available identifier of any smart contract
Registered Agent Requirements
As with traditional LLCs, a Wyoming DAO LLC must maintain a registered agent in Wyoming to receive service of process. The Articles of Incorporation may also specify whether the members or an algorithm manages the Wyoming DAO. If neither is specified, the law presumes that the DAO is member-managed. You may only form an algorithmically managed DAO if the members can update, modify, or upgrade the smart contracts. Notably, the new law doesn’t define algorithmically managed.
The initial filing fee for starting a DAO LLC is $100.
What Does This Mean for the Crypto Future, and Will other States Follow Suit?
DAOs are undoubtedly emerging and growing business structures despite recent negative press about cryptocurrency. Now that Wyoming has provided a solid template for allowing Wyoming DAOs to operate as LLCs, it is highly likely that other states will follow suit. In addition, the new Wyoming law will likely attract new cryptocurrency entities to the state, resulting in a tech employment boom.
