DAOs have evolved into an entirely novel class of organisations, but the law is yet to catch up with this reality. A majority of them are unregistered and therefore have an uncertain legal status. This uncertainty is likely to impede their growth and development, especially in light of traditional tax and auditing requirements. For the same reason, DAOs cannot presently claim any legal privileges (such as limited liability) available to registered corporations.

If a DAO is not run by an incorporated concern, it is likely to be treated as an unincorporated partnership. In such partnerships, each individual has unlimited liability. Therefore, if a DAO is hacked or declares bankruptcy, each member is exposed to liability for the whole loss. If a lawsuit follows and the plaintiff is unable to recover fully from the “DAO partnership,” he may turn to the personal assets of each DAO member until their claim is satisfied. Certain states (such as Wyoming) have taken proactive legislative steps in this regard but the extent to which DAOs can be absorbed within the principles of corporate law remains to be seen. A key area of contention in this regard is whether a DAOs native token constitutes a ‘security’. In United States law, the Howey Test provides this standard, but it is not clear whether fully decentralised organisations fall within its ambit.

Another pertinent issue here is AML/KYC compliance. Since DAO members are just crypto wallet holders, individuals often remain pseudonymous. As a result, compliance with AML/KYC policies becomes difficult if not impossible. This explains why most DAOs choose to start off as small communities of known members. As this organisational form grows and members from many different jurisdictions begin participating, however, it is clear that one will require common international standards for DAO governance and regulation. What is more, since they remain, by and large, unregulated legal entities – no legal guarantee associated with traditional businesses (such as property rights, contract breaches, investor protection etc.) is offered upon membership. A viable method of bypassing this bottleneck may be to route the DAOs traditional business functions through a recognised legal form – such as a registered company in a particular jurisdiction. The precise manner and architecture of this integration will, however, depend on the specific purposes of the DAO.

Having said that, there are many grey areas in which it is not possible to determine whether an NFT holder is the actual owner of an underlying asset. Instances of copyright and trademark infringement, for instance, are quite widespread in the cryptoverse. Oftentimes when an NFT project is successful, many iterations of it may be released such that they become barely distinguishable from each other. The copyright issues such projects raise need to be analysed on a case to case basis, and in light of evolving precedent. If any commercial use-rights flow from the NFT project (for instance the right to specific merchandise or access to events) then they must be carefully drafted before being promised to the NFT holder. Presently, in our view, most NFT projects do not take these challenges seriously, and therefore carry the risk of serious legal conflicts in the future.