CHAPTER 8: COMPARATIVE OUTLOOK: UTAH DAO ACT VS. INTERNATIONAL JURISDICTIONS
Before Utah’s groundbreaking legislation, attempts to provide DAOs with legal standing were limited and commonly sought outside of the US. Let's review global alternatives outside of the US and how that stack up to the Utah DAO.
Swiss Foundation Model
Switzerland, particularly its Crypto Valley in Zug, has been a pioneering community in DAO formation. Crypto Valley DAOs often register as Swiss foundations to gain legal status. For example, the Web3 Foundation leveraged this model to fund and oversee projects like Polkadot. However, this structure requires traditional governance elements, such as a board, which can constrain decentralization.
Establishing a DAO as a Swiss foundation offers legal recognition, asset protection, and access to Switzerland's robust financial infrastructure. However, this approach involves regulatory requirements that include the necessity of appointing a local director, maintaining a registered office, and fulfilling specific financial obligations. For instance, the minimum initial capital required is CHF 50,000 (approximately $52,000 USD), which must be deposited into a blocked bank account before registration. Additional fees include Commercial Registry and notary costs ranging from CHF 2,000 to 2,800 (approximately $2,100 to $2,950 USD), and Federal Supervisory Board fees between CHF 800 and 5,200 (approximately $840 to $5,480 USD), depending on the foundation's type. Furthermore, first-year expenses for basic establishment services, director fees, and compliance measures can push the total initial cost to CHF 90,000 or more (approximately $94,500 USD). Swiss office rental or ownership is very expensive, not to mention wages paid to a local director.
Once established, amending the foundation's constitutional documents is challenging due to stringent procedures. Additionally, the foundation is subject to supervision by Swiss regulatory authorities, which have broad oversight powers. An external auditor must be appointed, with the audit's scope depending on the foundation's asset size. These factors may impact the suitability of a Swiss foundation for certain DAO projects.
Malta, The Blockchain Island
Malta has established itself as a pioneer in blockchain regulation with the introduction of the Innovative Technology Arrangements and Services Act 2018. This law provides a comprehensive legal framework for innovative technology arrangements (ITAs), including DAOs. Unlike jurisdictions that allow minimal oversight for registering blockchain entities, Malta's approach emphasizes significant regulatory oversight through a dedicated authority—the Malta Digital Innovation Agency (MDIA).
Under this framework, applicants must apply to the MDIA for certification of an ITA. To achieve certification, the process mandates a registered systems auditor to perform an audit and code review. Additionally, the DAO must appoint a registered technical administrator with the authority to intervene in cases of material loss to users or breaches of the law. This rigorous process aims to ensure transparency and compliance.
While Malta's framework is well-suited for AI-driven DAOs, it presents challenges for DAOs governed by people. A significant limitation is the role of the registered technical administrator, who holds unilateral authority to modify the DAO’s code—an action fundamentally at odds with the decentralized governance mechanisms that DAOs are built upon. Within the decentralization ethos, by design no single person or entity is intended to control a DAO, making this requirement problematic.
Moreover, the framework adds another layer of complexity - changes to the DAO's code must undergo review by the systems auditor and approval by the technical administrator. Even if token holders agree on proposed changes through the DAO's governance structure, these changes could be rejected unilaterally. This undermines the decentralized decision-making process that DAOs seek to uphold.
Finally, no DAOs have been certified as ITAs under this framework, partly due to high administrative costs and these structural limitations. While Malta's approach demonstrates regulatory ambition, its current design has restricted adoption, especially for DAOs governed by token holders rather than artificial intelligence.
The Marshall Islands
The Marshall Islands has emerged as a global leader in DAO regulation, offering one of the most advanced legal frameworks for decentralized autonomous organizations. Under the Amended DAO Act of 2023, the Marshall Islands has refined its approach to DAO governance, introducing groundbreaking features such as Series DAO LLCs, which allow for sub-DAOs with distinct assets and liabilities. This makes it ideal for complex DAO structures that require modularity and operational separation. The legislation also provides clarity around token classification, explicitly stating that most governance tokens are not considered securities if they don’t confer economic rights. Additionally, DAOs registered in the Marshall Islands benefit from streamlined operations, as blockchain records can replace traditional paper documentation, and anonymity is preserved for members, except for one KYC-compliant representative.
Despite these advantages, establishing a DAO in the Marshall Islands comes with significant costs. The initial capital requirement is approximately $52,000 (50,000 Swiss francs), and hiring MIDAO as the registered agent is mandatory. These expenses, coupled with the island's geographic and regulatory distance from major markets like the U.S. or EU, may pose challenges for smaller DAOs. However, for globally ambitious projects with sufficient resources, the Marshall Islands offers unparalleled legal sophistication and global prestige, making it an attractive jurisdiction for high-profile blockchain ventures.
In contrast, Utah offers a more accessible and cost-effective option for DAOs. Its framework eliminates the need for significant upfront capital and provides a straightforward registration process similar to traditional LLCs. This simplicity and affordability make Utah an attractive option for cost-conscious DAOs.
In summary, the choice between the Marshall Islands and Utah hinges on a DAO's priorities. For the cost-conscious, Utah provides a simpler, more accessible solution. Conversely, for DAOs with complex governance needs and sufficient funding, the Marshall Islands offers a jurisdiction not directly subject to US securities law ambiguities.
The Cayman Islands
The Cayman Islands are a leading jurisdiction for legal entities supporting Decentralized Autonomous Organizations (DAOs), with the Foundation Company (FC) being a frequently used and internationally recognized structure. Unlike traditional corporations, FCs are independent legal entities that do not require owners or shareholders, aligning with the decentralized ethos of DAOs. These entities can be established quickly—often within a day—and serve functions such as hiring talent, securing funding, and holding assets. With no corporate, income, or capital gains taxes, they ensure DAO treasuries remain intact for operations. The customizable governance structure allows token holders to directly influence decisions, embedding decentralized governance into a formal legal framework.
Setting up a Cayman Foundation Company involves specific costs and requirements, including:Initial incorporation fees ranging from $1,000 to $2,000 USD.
Annual registered office expenses between $1,500 and $3,000 USD.
Compliance with the Virtual Asset (Service Providers) Act (VASP Act) and anti-money laundering (AML) regulations, which can cost between $5,000 and $20,000 USD annually.
Optional professional director services, which add another $5,000 to $10,000 USD annually.These regulatory requirements provide significant flexibility and tax neutrality, but the associated costs may make the Cayman Islands more suitable for well-funded DAOs seeking global prestige. By comparison, Utah offers a simpler and more affordable framework, particularly for U.S.-focused DAOs, with limited liability and decentralized governance options through smart contracts.
In comparison, the Utah DAO LLC offers a simpler and more affordable option for U.S.-focused DAOs. It provides limited liability, decentralized governance through smart contracts, and low setup costs. However, it currently lacks the global recognition, tax neutrality, and intangible sophistication (if one finds value therein) of the Cayman FC.
Chapter 8 Key Takeaways:
Switzerland, Malta, and the Marshall Islands provide alternative models, often with higher costs and/or centralized governance elements.
Utah’s framework is more cost-effective and aligned with decentralized governance, appealing to cost-conscious DAOs focused on global scalability.