Recently, a new form of organization has arisen: the Decentralized Autonomous Organization, or DAO. Imagine a business where decisions aren’t made in a boardroom but coded into computer programs, and where ownership is tracked not by paper or spreadsheets, but by digital tokens floating in cyberspace and recorded by blockchain. It’s a fascinating, futuristic concept — one with real potential.
As Gov. Glenn Youngkin recently announced, Virginia is the top state for business, and our thoughtful commercial laws are a part of the reason why.
The Virginia Bar Association (VBA) Business Law Section works with lawmakers to ensure that the Virginia Limited Liability Company (LLC) Act, adopted in 1991, remains clear, modern and carefully balanced — providing businesses and investors with reliable, predictable rules while allowing for innovation and growth. The VBA examines relevant proposed legislation and advises on whether it will improve the legal climate for our businesses.
DAOs offer a new structure that gives an opportunity for investors to participate in growth and governance in a way that meets them where they are in the modern world. But how can Virginia best provide a legal framework for DAOs?
New House Bill 1786 offers a framework by making DAOs a new kind of LLC, but one we believe is flawed in the details of how it fits with our LLC Act and does not answer some fundamental questions. The bill is essentially identical to one adopted in Tennessee three years ago and has not been customized for Virginia’s highly respected LLC Act.
The details are holes, ambiguities and faulty references. Imagine your football team playing a game where you don’t know how many timeouts you get or whether the clock stops when the ball goes out of bounds. Imagine a rulebook where extra points are called free throws and you don’t see a rule against facemasks.
The fundamental questions involve the nature of why our commonwealth establishes and recognizes corporations and LLCs as legal entities. Put very simply, owners and investors in corporations and LLCs are granted limited liability but only so long as they “play by the rules” set forth in our business laws. The rules protect not only owners and investors but also the public and relevant third parties from the actions and inactions of the entities. The rules also provide legal stability that allows businesses to plan and prosper. This, in turn, has enabled corporations (and recently LLCs) to raise capital and drive economic growth for centuries. We do not want an off-the-shelf bill to introduce uncertainty to our carefully crafted and successful set of laws that have been so good for Virginia’s business climate.
Let’s put aside for a second the issue of protecting people who purchase tokens because, in part, that is a securities law matter, and in part, that may be a value judgment of letting investors balance risk and reward. Let’s focus on third parties doing business with DAOs and the public.
In general, our laws enable you to know who you are dealing with when doing business with a Virginia corporation or LLC. And Virginia entities cannot just drain their bank accounts and give the cash to their owners when they owe other people money. Or when the company has liability for polluting a creek or its truck hitting a school bus. At the end of the day, if a Virginia entity does not play by the rules, there will be real people who can be held accountable. Real people whose names and addresses are required to be in corporate and LLC records.
If a DAO does not play by the rules, though, who are the people responsible? Our LLC Act says an LLC must keep an available record of all its members and addresses. HB 1786 says no DAO shall have an obligation to furnish any information if available on an open blockchain.
If your business is owed money by a DAO or a DAO fails to fulfill its contract to you, how will you access and “read” the blockchain to see who are the responsible people? We cannot assume our businesses and the public will have the resources of a three-letter U.S. agency.
Perhaps there is an easy technological answer to this question. But that is not reflected in the DAO bill. Perhaps the DAO bill could require DAOs to maintain a system that serves this purpose. But that is not in the bill either.
None of this is to assert DAOs don’t belong in Virginia — far from it. Virginia is for Innovators.
But Virginia is known for getting things right. There is no reason not to take the time to iron out the details and let Virginia take the lead on DAOs without leaving big questions unanswered.
Fourd Kemper is an attorney in Roanoke with Woods Rogers. He is also Chair of the Virginia Bar Association’s Business Section, chair of his firm’s Emerging Growth & Venture Capital practice group and is the Co-Chair of the GO Virginia Region 2 Emerging Tech cluster workgroup.
