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Looking back, 2022 was a turning point for the development of crypto policy and regulation.
Sweeping regulations in Europe, mixer sanctions and the collapse of several prominent exchanges are just some of the highlights of a dramatic year in the space.
So what can we expect from the next 12 months? Well, in our new one “Regulatory Outlook Report”we examine five trends that will have a big impact during 2023.
In this third of five excerpts from the report, we argue that Decentralized Autonomous Organizations (DAOs) will emerge as one of the major regulatory and political issues in the cryptospace in 2023.
What is DAO?
DAOs are one of the most intriguing innovations in the cryptoasset space. They provide a new approach to collective enterprise; a dispersed set of individuals located anywhere in the world can purchase a token that represents a stake in the DAO, which gives voting rights and a share in the profits related to the core activities of the DAO.
DAOs provide the governance framework for many of the most popular DeFi services, such as Uniswap and Aave. The popular Maker DAO supports one of the largest DeFi applications available today, allowing users to access lending capabilities using the Dai stablecoin. DAOs have also been formed for a wide variety of niche initiatives – from allowing participants to own a piece of the US Constitution to serving as distributed in-game homeowners associations Decentraland.
Ultimately, DAOs offer the ability to change traditional business founding and venture capital models by leveraging the open nature of blockchain to democratize ownership and allow individuals anywhere in the world to collaborate on ventures with minimal barriers to entry.
However, DAOs also raise complex new legal and regulatory issues. for example:
- Who is responsible for the activities of the DAO?
- Does a DAO have to register anywhere as a corporate entity?
- Can regulators assert jurisdiction over DAOs or individual governance token holders?
The urgent need to find answers to these questions will lead to DAOs emerging as one of the major regulatory and political issues in the crypto space in 2023.
Catching up
In 2023, we will see more jurisdictions follow the example of Wyoming and the Marshall Islands by establishing legal frameworks that allow DAOs to register as corporate entities and ensure that members benefit from the limited liability extended to other registered companies. Clearer legal fences will help DAOs gain legitimacy and ultimately drive their growth – while also ensuring their accountability.
However, in 2023, regulators will also pursue numerous enforcement actions against DAOs and their members for non-compliance with financial regulations. In September 2022, the US Commodity Futures Trading Commission (CFTC) began enforcement proceedings against Ooki DAO, which the CFTC alleged operated an unregistered futures exchange allowing clients to access leveraged trading services without obtaining CFTC approval.
In November, the US Securities and Exchange Commission (SEC) took steps to block the registration of certain tokens issued by The DAO to protect consumers from misleading claims about their regulatory status.
This will be just the first of many enforcement actions targeting The DAO. In 2023, we expect the CFTC and SEC to take further enforcement action against The DAO. Regulatory pressure on them will increase in other parts of the world. The EU, for example, has already started drafting updates to bring DAOs into the regulatory framework of the cryptocurrency bloc.
In addition, 2023 will see more focus on financial crime risks associated with DAOs – for example, the risk that illegal actors could launder funds by purchasing DAO management tokens with infected cryptoassets, or the potential for DAOs to be targeted hacking and market exploits.
To learn more, click below to download our brand new Regulatory Outlook report.
Click here for parts one, two, four and five of our excerpts from the regulatory review report.
