Decentralized Autonomous Organizations (“DAOs”) are usually defined as organizations established for perpetuity that consist of program code executed and stored in a decentralized manner. They are allocated own capital in the form of crypto assets, which are directly managed by the capital providers according to the automated and fixed rules of the program code. These definitions are of limited help to the average user or interested investor. In particular, they do not provide any information on how DAOs or their shares are to be classified legally. However, it is precisely these questions that are naturally of decisive importance both for initiators of DAOs and for participants in a Decentralized Autonomous Organization. Thus, the first question that arises in this context is whether DAOs can qualify as companies under German corporate law. In this context, it is not possible to make a generally valid statement as to whether a DAO is a company. Should it be assumed on the basis of the specific structure of the DAO that the DAO is founded on a contractual basis, then a DAO could qualify, for example, as a partnership under civil law or as a general partnership. If the DAO in the individual case would be a structure under corporate law, then the subsequent question arises as to the supervisory qualification of such DAO shares.
Regulatory Classification as an Investment or as a Security (Sui Generis) Through Tokenization
If the DAO were to be a company, shares in a DAO which grant their owners a participation in the results of the DAO would generally be classified as an investment within the meaning of the German Asset Investment Act (“VermAnlG”). If these were tokenized, which is likely to be the rule, BaFin would – according to its administrative practice – qualify the respective tokens as securities of their own kind with the consequence that the provisions of the German Securities Prospectus Act (“WpPG”) would apply to the tokens. This would be the case if the transferability and tradability on the financial market of the tokens as well as the mediation of rights similar to securities through the tokens were achieved by the tokenization. Even in the case that the tokens would not convey a participation in the result of the DAO and thus would not be legally qualify as an asset, a qualification of the tokens as securities of their own kind is nevertheless possible, provided that the aforementioned characteristics of transferability, tradability and conveyance of rights are fulfilled. An example would be that a token does not grant any participation in the result of the DAO concerned, but conveys membership rights in the DAO, e.g. in the form of voting rights. A prospectus or securities information sheet would then have to be prepared and published prior to a public offering of such tokens.
Applicability of MiCAR to Shares in DAOs
In general, the EU Regulation on Markets in Crypto Assets (“MiCAR”) will not be applicable to the shares of DAOs described above. This is because the described shares are transferable securities and thus financial instruments within the meaning of the Markets in Financial Instruments Directive II (“MiFID II”). To such, however, MiCAR will precisely not be applicable. Should this not be the case for a specific DAO, i.e. in particular in cases where the shares of the DAO do not qualify as transferable securities in the aforementioned sense and thus not as financial instruments, the provisions of MiCAR would arguably be applicable to the shares. Here, as generally in this very complex subject area, a precise review will have to be carried out in each individual case in order to minimize liability risks and to achieve a legally compliant arrangement.
Atty. Dr. Konrad Uhink