The Marshall Islands Wants Money-making DAOs To Call It Home

The Marshall Islands is taking a notable step forward in terms of regulating DAOs: legally recognizing both nonprofit and for-profit versions of the autonomous organizations like limited liability companies (LLCs.)

It marks the latest move by the island nation to make a play for a slice of the big money behind DAOs. And it comes on the heels of the increased prospects for tighter scrutiny of digital asset operators by financial watchdogs. That’s perhaps especially true in the US, as politicians and regulators alike search for the best path forward after FTX’s bankruptcy. 

The bill behind the Decentralized Autonomous Organizations Act of 2022 became law on Wednesday, a government representative said in a statement. 

Here’s what the incoming legislation — which the government billed the first of its kind — does, according to the statement:

• Establishes a DAO registry, overseen by the local DAO-focused firm MIDAO, to 
• Allow any type or size of DAO to incorporate in the Marshall Islands under an LLC structure under the newly created designation of DAO LLC. Registrants must delineate their structure to MIDAO as either “member managed” or “algorithmically managed,” per the legislation.  
• Potentially “reduce or eliminate fiduciary duties” for DAOs, according to the text. The measure may exempt decentralized entities, and their corresponding smart contracts, from certain stringent typical LLC requirements.
• Permit, from a regulator perspective, the decentralized collectives to engage in their typical course of business, including the following: governance measures (such as voting on community proposals) and investment activities, such as tokenization .
• Sets up a government-run investment fund to “continue education and training around DAOs and how to integrate them further into the economy.”

Earlier this year, the nation passed a law to set regulatory standards strictly for nonprofit DAOs — leaving many collectives in the business of making money in legal limbo. It wasn’t a crypto-specific measure, either, but rather an update to existing LLC rules to include DAOs. Yet it didn’t detail a legal standard for what a DAO actually is. 

Marshall Islands courting DAOs with laws

Bransen Wase, the Marshall Islands’ finance minister, said in a statement that the country is committing its “courts and resources to the burgeoning world of decentralization, and recognizes the unique place that decentralized autonomous organizations can hold not just in the blockchain space, but in the broader economy as well.”

The initial effort places the Marshall Islands in contention with a select number of jurisdictions worldwide that have already made a serious political push to recognize DAOs. The state of Wyoming is the prime example. 

Industry participants say regulatory first-movers are in prime position to capitalize, in terms of potential tax revenue that would balloon if the digital groups continue to multiply. Seeing those governmental dollar signs, of course, would not be on the table for nonprofits alone. 

That is, if those in power can figure out a comprehensive-but-fair framework for doing so.

How the DAO community reacts, in particular, to the up-and-coming know-your-customer mandates is still up in the air. There’s long been a spirit of anonymity, or pseudonymity, among decentralized proponents — as well as a distrust of governmental bodies, at least in certain circles.  

Adam Miller, MIDAO US-based chief executive who has worked closely with Marshall Island officials on the Decentralized Autonomous Organizations Act, told Blockworks that it’s crucial for DAO employees — and even members — to comply with those standards.

“What a lot of people don’t realize is that if you’re working as part of a DAO, or you’re a member of a DAO in any way, you can’t just say, ‘Well, we’re just gonna’ not be [subject to], in any way, the law, right?” Miller said. “You can’t just back out and say, ‘We’re just not going to be involved with the legal system.’”

The impetus for the legislation, according to Miller, stemmed from a series of conversations between vocal, and some local, DAO participants and government officials. It was an idea that came to mind when Miller and other industry participants were pushing for the government to roll out its own cryptocurrency in 2018. The initiative — ambitious, especially at the time — ultimately failed.

“We all started working on it together and thought, ‘OK we recognize that DAOs didn’t have a good way to incorporate at the time. And, so, we just started thinking, ‘Is this a problem we can help solve?’ And that’s what ended up leading to initially proposing an amendment to the nonprofit entities act last year, and then eventually drafting this new legislation this year.”

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