Collaborating with Tech London Advocates (TLA) Blockchain Legal and Regulatory Group, the Law Society published a second edition of its legal and regulatory guide to blockchain on 11 January 2022. Marc Jones, a partner in our Commercial Litigation, Fraud and Securities teams, authored the section on Decentralised Autonomous Organisations.
The report addresses the growing uses of distributed ledger technology (DLT) and cryptoassets and developments in the past 18 months, accelerated by the Covid-19 pandemic, as well as DLT’s wider impacts on the law including in smart contracts, data protection, dispute resolution and environmental, social and governance (ESG). The full report is available to download for free here.
In an event to launch the new edition, Master of the Rolls Sir Geoffrey Vos stated that “major developments are imminent” in the field of DLT. “They will mean that every lawyer will require familiarity with the blockchain, smart legal contracts and cryptoassets.” Law Society president I. Stephanie Boyce concurred that “distributed ledger technology, smart legal contracts and cryptoassets will likely form the infrastructure of the digital economy and basis for future transactions, which lawyers will continue to advise on.”
Marc Jones is one of several experts in the field of cryptoassets that has contributed to the report. His section focuses on Decentralised Autonomous Organisations.
What are DAOs?
Determining the legal status of the new and different assets and relationships that DLT gives rise to is a major challenge. This is nowhere more true than in the case of Decentralised Autonomous Organisations. Marc’s section of the report explores the difficulties in determining what a DAO actually is on a common law basis, and who takes legal responsibility for a DAO. How DAOs are to be classified legally is of enormous commercial and regulatory significance for developers, investors and regulators alike in this rapidly growing field.
The conflicting range of opinions on this area was highlighted recently in contrasting comments made by the chief legal officer of Shapeshift, following the announcement that the crypto-exchange would become a DAO, and the new chairman of the SEC. The former said “Shapeshift is not an exchange, is not a financial intermediary and is not holding custody of any funds. It’s simply an open-source interface for users to interact with their own digital assets.” Marc notes in the report that “on that view, a DAO is just software, not an entity.”
In contrast the chair of the Securities and Exchange Commission has expressed the view that decentralised finance platforms do in fact have a degree of centralisation, saying: “It’s a misnomer to say they are just software put out in the web”. Marc says in the report that this contrast highlights to opposing positions which meet head on in DAOs: some promoters of decentralised finance are not simply trying to disrupt traditional financial services/ markets but to escape altogether the regulations (and even the legal system) that apply to them; but the reality is that all activity takes place within a legal system.
Other topics discussed in the report
The guidance included in the report “covers a wide range of key issues for legal practitioners to be aware of when advising on DLT-related matters”, spanning various practice areas and sectors as well as the process of providing legal advice.
The themes explored include:
- Commercial application of blockchain technologies
- Regulation of cryptoassets
- Non-fungible tokens (NFTs) and social tokens
- Smart contracts and data governance
- Blockchain consortia
- Data protection and security
- Intellectual property
- Dispute resolution
- Competition law
- Tax implications of cryptoassets
- Blockchain and ESG
The report makes key recommendations and aims to “provide a useful stepping stone in the process of decentralisation and smart contracts changing the very way financial, property and legal services are carried out.” As well as lawyers, the recommendations are also aimed to support all those working in professional services including technologists and academics.
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