The interconnected global economy encourages smaller territories to develop economic niches. Unable to compete with the natural resources or hard power of larger nations, smaller countries have to specialize. But choices are limited for an isolated country like the Marshall Islands, situated between Australia and Hawaii.
The country is so remote that in 2020, it recorded its first coronavirus case in late Oct. Both cases were from U.S. military personnel flying in from Honolulu. So, the tiny republic has chosen a less obvious path: Web3.
As a result of the new Decentralized Autonomous Organizations Act of 2022, legal entities registered in the country will be allowed to formally adopt DAO structures. Organizations from across the globe will be able to register in the Marshall Islands as Limited Liability Companies, or DAO LLCs.
The act follows legislation passed in Jan. 2022, which was the first law to recognize DAOs of any kind as legal entities. Although, the first law only applied to non-profit organizations. The new law breaks ground in a few areas, including creating an investment fund for education and training so interested parties can more easily take advantage of this new governance structure.
The legislation is a world first for regulating DAOs. The country’s government is hoping it will encourage a wave of adoption from inside the islands and beyond. Thirty DAOs have registered since the initial law was passed. The Marshall Islands are betting on the for-profit element attracting many more.
“Decentralized autonomous organizations present an enormous opportunity for people to organize in a more efficient and less hierarchical manner, said Bobby Muller, former RMI Chief Secretary and President and Co-Founder of MIDAO. “We in the Marshall Islands recognize this unique moment to lead in this critical space.”
Breaking New Ground For DAOs
Part of the legislation gives a formal role to MIDAO (or Marshall Islands DAO) to help incorporate new entities. For those who register in the territory, MIDAO provides a mailing address and submits annual reports on behalf of DAOs in accordance with the new law.
Its CEO, Adam Miller, tells BeInCrypto that there is nothing unexpected about this move. Especially when you look at the country’s history. “The Marshall Islands is spread out over five islands, and 29 coral atolls and have been operating for hundreds of years off basic decentralization tenets. Now that decentralized governance tools exist, we believe that they can be utilized on a more local level for government needs that best fit the local environments.
There are also very few limitations on who and what can register as a DAO in the country. According to MIDAO, being “on-chain” is also not a prerequisite. “For anyone who has more than 10% governance rights, once a year, they have to do traditional KYC,” says Miller. “For on-chain DAOs, we are going to do on-chain analytics to make sure that the DAO is not engaged in criminal activity or has people who are sanctioned.” DAO members and founders will also not have to set foot in the country to take advantage of the new law.
As a result of this groundbreaking legislation, the tiny Pacific nation expects hundreds of DAOs to incorporate over the course of the next year.
Legal Clarification on DAOs Is Much Needed
DAOs are a relatively novel governing structure. But, the Marshall Islands is not the only jurisdiction to explore where DAOs fit into the existing legal system. Some DAOs have been incorporated as Foundations in the British Virgin Islands, Switzerland, and the Cayman Islands. As of Nov. 16, the United Kingdom Law Commission is seeking views on how decentralized autonomous organizations (DAOs) can be characterized and fully incorporated into English and Welsh law.
Different states in the US also have passed legislation allowing for various degrees of incorporation. Any clarification is important for many reasons. In Colorado, Colorado Limited Cooperative Associations (LCA) and Unincorporated Non-profit Associations (UNA) have been used by some DAOs. Tennessee and Wyoming have also created DAO LLCs, like the Marshall Islands.
In most jurisdictions, the uncertain status of DAOs creates liability problems for those involved. Regardless of whether they call themselves a DAO, the law treats a group of people engaged in a shared enterprise without a legal entity as a general partnership. In most cases, without a formalized legal structure, DAOs cannot sign contracts or open bank accounts. They are also prevented from hiring and firing employees.
A specialized DAO LLC status can also provide an insurance policy against centralization. Preventing a critical mass of its members from seizing control and quickly de-DAOing the group.
Perhaps most importantly of all, legally incorporated DAOs can better protect their members. The members of the DAO will not lose their tokens, governance smart contracts. Or the ability to reorganize if the DAO is sued and forced out of business. Like other enterprises, there is an opportunity for a second chance, of sorts.
Decentralization is a Force For Good, say MIDAO
One of the lessons of the past year is that decentralization can often prevent disasters. On-chain finances can lessen the need for trust. And with the technology already there, many crypto advocates have spent the last year screaming ‘Why?’ at centralized exchanges.
“During this crypto reset moment following FTX, it is critical that people understand this event would not have happened if the exchange were decentralized – DAO structures could have prevented this from happening,” said Miller in a press release.
As more nimble jurisdictions like the Marshall Islands move to formalize DAOs, there is hope that more will follow suit. As that progress quickens, the hope for many is that DAOs become the default, not the exception.
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