The Republic of the Marshall Islands made history in the second week of February by formally recognizing Decentralized Autonomous Organizations (DAOs) as legal entities.
The Marshall Islands revised its Non-Profit Entities Act 2021, making it possible for any DAO to register and start operating in the country. The amendments to the law mean that DAOs can now be incorporated as non-profit LLCs with bylaws and members that can register on the blockchain.
The Pacific state nation has incorporated MIDAO Directory Services Inc, a national organization to help other DAOs register with the Republic. This led to the registration of the first legal DAO in the form of Admiralty LLC for Shipyard Software, an infrastructure developer focused on decentralized finance (DeFi).
MIDAO co-founder Adam Miller explained the reasons behind his decision to work with the Marshall Islands government and help other entities register their legal DAO in the country:
“I spent months researching what technology could make it easier to launch and operate DAOs. Any solution would cost $10 million and over a year to build. Then the Marshall Islands law came along, and I realized it could help.” to solve an even bigger problem for DAOs, costing in the single digits of ETH and taking days to implement per DAO. That’s when I knew starting MIDAO would be the best way to make a positive impact on the DAO community.”
Admiral DAO will be the organizational entity in charge of regulating Clipper – a decentralized exchange (DEX) developed by Shipyard – on behalf of the community and future DEXs built by Shipyard.
What made the Marshall Islands a good destination?
Many of the existing laws and institutions that create legal entities have not yet taken into account the unique legal implications of DAOs.
As a result, implementing a DAO is not an easy task, even in regions with favorable regulations for nascent technology like blockchain.
Many jurisdictions require statutes to be specifically registered with the government, while the blockchain code may be irreversible. Additionally, many legal corporations are required to keep track of members using a name ledger, while DAOs typically use tokens. This means that most of the known options only offer partial options for token-based governance.
For example, Wyoming, in the United States. The US state legally recognized DAOs in July 2021, but this came with caveats. First, the regulations require a minimum of 50% approval in the community vote, which some see as an impractical goal to achieve. Second, it is not a sovereign nation, so it must abide by changes in federal law.
This is what led Shipyard Software to turn to the Marshall Islands, a jurisdiction that enjoys several advantages over others in terms of sovereignty and stability as a Freely Associated State of the United States. The nation relies on the reliability of US-aligned banking and financial systems and a fast, adaptable legislative process that can keep pace with evolving markets.
David Paul, Minister for Assistance to the President and Minister for the Environment of the Republic of the Marshall Islands, played a key role in formulating and driving the DAO legislation. Speaking to Cointelegraph, Paul explained why the country has opted to become a hub for DAOs:
“The Republic of the Marshall Islands sees DAOs as the first important step in becoming an internationally recognized and premier hub for the blockchain industry. In any form, the digital economy is the way of the future and we want to position ourselves as the jurisdiction of choice. We specifically recognize DAOs at this time as an early-stage innovation in the blockchain industry, and the Marshall Islands wants to be a leader in the DAO industry.”
“Laws and regulations will be created and ratified, based on what the market will require as this space evolves. To remain competitive, the Marshall Islands must continue to adapt to changes quickly and also responsibly at the same time,” he stated.
The sovereign nation has used blockchain technology in the past to simplify cross-border payments and has also started developing a sovereign digital currency. The nation first revealed its plans to launch a sovereign national currency in 2018 and its development began in 2020.
The sovereign currency called Marshall Islands Sovereign (SOV) is based on the Algorand blockchain and development work has been ongoing. The sovereign nation received a warning from the International Monetary Fund for its digital currency development program as early as June 2021.
Mark Lurie, founder and CEO of Shipyard Software, told Cointelegraph that they have weighed several factors, including regulations, cost, sovereignty, and clear DAO treatment before zeroing in on the Pacific island state.
Lurie also took note of the vulnerabilities that come with DAO networks, stating that security and decentralization were key parts of the legislation to incorporate DAOs.
Speaking about the awareness around the blockchain industry and DAOs in particular, Lurie said:
“I hope the mainstream media recognizes that not everything about blockchain is financial. DAOs are something very different from cryptocurrencies, just like a company is something very different from the US dollar.”
Are DAOs the future?
DAOs are decentralized governance systems that are powered by smart contracts and some form of human intervention such as community decision making. Since the first DAO was released in 2016, the concept has gained significant traction, particularly in 2021 amid the growing popularity of decentralized finance.
In the Information Age, traditional corporate employment is rapidly becoming obsolete as a means of coordinating activities, as evidenced by the growth of other types of income such as influencers, contractors, producers, sharing economy participants, and the like. others. These are all examples of people acting as individual value providers in complicated networks and receiving cash for their efforts, even though they don’t feel like “work.”
The previous paradigm of a corporation with rigid internal and external borders made sense 50 years ago, but now this approach leads to unbalanced incentives and unsustainable extraction. This is where decentralized systems like DAOs will act as the coordination layer for this new world.
the future of daos feels more like co-ops and artist collectives and less like a corporate sponsored “open source” event.
— fiii.eth (@fionais__online) July 23, 2021
DAOs are no longer just an optimistic notion, although they are still in their early stages of development. They are real companies managing billions of dollars in assets, providing real products and services to millions of people, and inventing new ways for people to make money.
Assange DAO is one of the most recent examples to highlight the growing popularity and power of DAO systems. As its name suggests, the DAO was created for anyone who wanted to help Julian Assange using Ether (ETH). Donors then received a proportional amount of their JUSTICE governance token, allowing them to vote on how the funds raised will be spent and on future initiatives aimed at supporting the whistleblower’s cause. The DAO raised a whopping $53 million.
Major governments around the world have been experimenting with blockchain technology in various sectors, but the decentralization aspect of the technology often takes a backseat. Thus, the Marshall Islands’ decision to offer LLC status to DAOs shows the legislator’s understanding of technology and how it could shape the future of traditional businesses for the better.