Virginia looked to position itself at the forefront of business innovation with HB 1796, the Virginia Decentralized Autonomous Organization (DAO) Act. The bill establishes the legal framework necessary for DAOs to register as limited liability companies under the Virginia Limited Liability Company Act. A DAO is a blockchain-based business structure that operates without centralized leadership. Instead, its members collectively operate the DAO in furtherance of a common goal by casting votes based on the number of tokens each member holds.
At present the bill has been amended to a study. However, the DAO Act should be a priority as it offers a major step forward in giving this new business type an official legal status under Virginia law and provides increased clarity on how blockchain technology can be structured and managed in accordance with law.
Unlike traditional legal entities, DAOs rely on “smart contracts” to facilitate decision-making and governance. At its most basic, a smart contract is a computer program that is intended to automatically execute actions once certain preset criteria are met. Instead of a centralized board of directors or CEO, any member that is a part of the DAO can participate in business decisions with the smart contract serving as the final arbiter. In this structure, every action, from financial transactions to company rules, is achieved through group consensus and is transparent to the members of the DAO through the underlying blockchain technology.
Even though DAOs are still a relatively new type of organization, it’s estimated that there are more than 13,000 DAOs in existence with a wide range of applications. Some of the most prevalent types of DAOs that exist are Protocol DAOs, which can power cryptocurrency exchanges; Philanthropy DAOs, which facilitate giving and fund grant projects; Social DAOs, which are built around communities based on specific interests; Collector DAOs, which invest in assets like art; and Venture DAOs, which can be used for pooled investments. A high-profile example of how these new business structures are being used is PleasrDAO, which leveraged its collective buying power to purchase the Wu-Tang Clan album “Once Upon a Time in Shaolin” for $4 million.
Recognizing their potential utility and impact amidst the rapid adoption of blockchain-based technologies, Wyoming was the first U.S. state to legally recognize DAOs, and other jurisdictions, including Tennessee and Vermont, have also done so. If (or more likely when) Virginia is added to the ranks of DAO-to-LLC frontrunners, this bill would further expand the opportunities for these new business management and ownership structures to gain traction, and this legislation would certainly make Virginia an attractive choice for those seeking limited liability status (along with its potential legal protections) for this new class of legal entities.
While DAOs offer transparency, they also give rise to a few unanswered questions about liability and accountability. In a traditional company, there’s always a clear decisionmaker— someone who takes responsibility if things go wrong. This is why regulation like Virginia’s approach is important for DAOs’ long-term prospects as a legitimate business vehicle, as it helps to balance innovation with legal safeguards, requiring DAOs to register as limited liability companies and comply with certain disclosure obligations.
By providing a legal framework for blockchain-based businesses, the state would position itself to be a hub for a new business model. In Virginia and elsewhere, this could lead to more jobs, increased investment and tax revenue, and a stronger, more innovative business environment. As the federal government and other states continue debating how to regulate blockchain technologies, Virginia needs to be taking steps to shape how this new way of doing business will work in the real world.
Charlyn Ho is an adviser to the Virginia Blockchain Council and the CEO of Rikka, a boutique law and consulting firm specializing in technology transactions, cybersecurity and privacy relating to emerging technologies like blockchain and artificial intelligence.