Is D&O ready for the DAO?  Rethinking corporate personality and responsibility

Is D&O ready for the DAO?  Rethinking corporate personality and responsibility

Tim Chan, Senior Associate, Norton Rose Fulbright & Founder of The InsurTechLawyer Blog

This is a paper presented at the XVI AIDA World Insurance Congress 2023, 30 August to 1 September 2023, Melbourne, Australia.

1.1 The Decentralised Autonomous Organisation (DAO) has had an undeservingly chequered past. Initially hailed as one of the most significant innovations since the invention of the corporate personhood, it heralded a new way to do business. However, tempering its glorious debut, DAOs have been plagued by vulnerabilities amounting in millions of dollars in losses and also implicated in criminal activity. DAOs have also been embroiled in multiple lawsuits and attempts to pinpoint its legal characterisation have been thwarted by its chameleon-like design.

1.2 Recent litigation in the United States demonstrates the complex liability questions that can arise in respect of DAOs. In jurisdictions that do not recognise DAOs as a separate legal persona, DAOs may be general partnerships in which token holders are jointly and severally liable for the DAO’s wrongful acts. This undesirable outcome fiercely hinders the creation an environment that enables DAOs to prosper. As a result, it has led to jurisdictions considering the best way to regulate DAOs and whether to grant DAO participants limited liability, a key to enabling business.

1.3 To envision the solution, policymakers have turned to understand the liability affecting DAO token holders. A translation of directors’ duties to DAO tokenholders is imperfect because of some fundamental differences – directors owe duties to shareholders; in a DAO there are no shareholders. Furthermore token holders are not capable of performing wrongful acts that a director of a company might be able to perform.

1.4 By legislating the recognition of DAOs in legal systems around the world, an opportunity arises for businesses to turn to DAOs as an alternative to the corporate vehicle. D&O insurers play an important role in ensuring directors have the confidence to perform their duties in the world of corporate law. What does the DAO opportunity mean for insurers? How might insurers serve this market? This paper considers the development of the DAO, liability issues, and proposals for token holder liability in this exciting and emerging area of law.

Read the complete paper by following this link.