The technological landscape is rapidly evolving, and with it, new forms of organizational structures are emerging. Decentralized Autonomous Organizations (“DAOs”) represent one such innovation that challenges traditional notions of corporate governance and legal frameworks.
A DAO is a blockchain-based entity that operates without a central governing authority. Instead, DAOs function through smart contracts with self-executing agreements with terms directly written into code, ensuring transparency and security. Unlike traditional companies with hierarchical management structures, DAOs operate on a democratic model, where members collectively make decisions through voting based on their token holdings.
The core operations of DAOs are predetermined in code through smart contracts, which automatically execute actions when specific conditions are met. This technological foundation allows DAOs to coordinate global activities without the need for traditional corporate infrastructure. It also provides for transparent operations conducted on public blockchains with a global-first digital presence unbound by geographical limitations
Recognition Under Indian Law
Despite the growing relevance of DAOs globally, in India there is no legislative regime to regulate them. India lacks any form of legislation recognizing DAOs as distinct legal entities. This creates significant challenges for DAOs operating within the Indian legal framework.
The primary issue stems from the absence on clarity of matters related to liability, contractual obligations, and regulatory compliance. Without legal recognition, DAOs face significant hurdles in directly owning assets in India, requiring legally recognized intermediary entities to hold assets on their behalf.
In the absence of specific legislation, Indian courts might interpret DAOs through the lens of existing legal frameworks. The California Federal Court in Sarcuni v. bZx DAO, observed that DAOs could potentially be classified as general partnerships under the Section 16202(a) of California Corporations Code. The Court reasoned that under Californian law, a partnership is formed when two or more individuals associate to operate a business for profit, regardless of whether they intend to establish a formal partnership and plaintiff has to the satisfaction of court established that (1) existence of shared management rights; (2) joint participation in profits and losses; and (3) contributions by each party in the form of capital, property, or services.
However, as opposed to the US law, where the intent of the parties to form a partnership is immaterial, in India, whether a partnership exists is a determination based on the intent of parties and relevant facts. Section 4 of the Indian Partnership Act,1932 defines a partnership as “the relationship between persons who have agreed to share the profits of a business carried on by all or any of them acting for all”. Since DAOs are primarily governed by smart contracts and involve members sharing in potential profits, they could be governed by partnership contracts and construed as partnerships within the existing legal framework.
Pursuant to Section 25 of Indian Partnership Act,1932 a partner in a general partnership under Indian framework has unlimited liability. This classification would have significant implications on members of an unregistered DAO as they could potentially be held personally liable for the actions and obligations of the DAO, exposing their personal assets to claims for damages.
Challenges in Corporate Structure
Registering a DAO as a company under the Companies Act, 2013 presents several challenges. A Company under the Companies Act, 2013 is governed by its charter documents i.e. Memorandum of Association (“MOA”) and Articles of Association (“AOA”) wherein DOA is governed through smart contracts. The Companies Act,2013 under Section 170 mandates company to maintain registers with details of directors, shareholders and key managerial personnels. This conflicts with the pseudonymous and fluid nature of DAO membership.
Securities Regulation
A critical legal concern for DAOs in India relates to the classification of DAO tokens under securities law. Currently, neither the Securities Contracts (Regulation) Act, 1956, nor SEBI regulations explicitly recognize DAO tokens. This creates uncertainty regarding whether these tokens qualify as securities subject to SEBI’s jurisdiction.
The landmark cases of Sahara India Real Estate v. SEBI and Bhagwati Developers Pvt. Ltd. v. Peerless General Financeb wherein the court observed that if securities are not listed or traded on a stock exchange, they can still be considered marketable if they are transferable and capable of being sold in the market. This rationale could potentially be applied to bring DAO tokens under securities regulation, as it established an inclusive approach to defining securities. However, this remains speculative until SEBI takes a definitive position or legislative changes occur.
Intellectual Property Rights
In India, intellectual property rights pose another significant challenge for DAOs. Current laws require IP rights to be registered under natural or recognized legal persons. Trademarks under Section 18 of the Trademarks Act, 1999, patents under Section 6 of the Indian Patent Act, 1970, and copyrights under Section 17 of the Indian Copyright Act, 1957, all require registration in the name of a recognized legal entity.
Consequently, DAOs would need to use intermediary entities to own IP assets, introducing complexities and potential conflicts with the DAO’s decentralized governance structure.
International Trends and Examples
Internationally, several jurisdictions have taken proactive steps to recognize and regulate DAOs. Wyoming in the United States has emerged as a pioneer in this field with the passage of the Wyoming Decentralized Autonomous Organization Supplement.
This groundbreaking legislation recognizes DAOs as a distinct form of Limited Liability Company, allowing them to own property, enter into contracts, and enjoy legal personhood. More recently, in March 2024, Wyoming introduced “decentralized unincorporated nonprofit associations” classification, providing DAOs with legal existence and limited liability protection.
The Wyoming approach demonstrates the practical possibilities when proper legal frameworks exist. A case study of a 6,000-member DAO successfully purchasing 40 acres of land in Wyoming illustrates the tangible benefits of legal recognition.
Beyond Wyoming, other US states like Utah and New Hampshire have introduced laws recognizing DAOs as separate legal entities without requiring incorporation, based on the model law drafted by the Coalition of Automated Legal Applications. This approach focuses on recognizing DAOs that meet specific technical and governance criteria rather than forcing them into existing corporate structures.
Conclusion
DAOs represent a revolutionary approach to organizational structure and governance, offering exciting opportunities for global collaboration, democratized decision-making, and innovative business models. For Indian entities or individuals engaging with DAOs, careful consideration of legal structures is essential. Until specific legislation is enacted, using intermediary entities to bridge the gap between DAOs and traditional legal structures may be necessary, despite the irony of introducing centralization to decentralized organizations.
As technology continues to evolve, so too must our legal frameworks. The success of DAOs in India will depend heavily on the evolution of legal recognition that bridges the gap between innovation and legality.
