The Marshall Islands pioneered globally in recognizing decentralized autonomous organizations (aka DAOs) as legal entities. The local authorities’ decision automatically resulted in the jurisdiction’s rating boost in the crypto business and blockchain community interested in ways to secure asset protection, confidentiality, with following all instructions to a tee.
DAO and the Marshall Islands
The country’s new legislation gives equal rights to DAOs and Limited Liability Companies (LLC), allowing them both a legal entity status, with all the corresponding rights and obligations that follow. They may hold real estate and other assets.
In early February 2022, the country’s Non-Profit Entity Act of 2021 was amended accordingly. The amendments allow DAO incorporation in the form of a non-profit LLC, with blockchain registered articles of association and members. A blockchain company like this shall be incorporated under the general corporate laws of the Marshall Islands, with the following distinctions:
- blockchain corporation’s income or profit may not be distributed between members, directors, or officials thereof, either in full or in part
- members’ legal and beneficial title to the organization shall be described in its member register and smart contract
- blockchain business’ non-commercial corporate objective shall be clearly defined. It will be mentioned in the company’s Certificate of Incorporation posted on a blockchain.
The blockchain organization shall operate as a limited liability company managed by its members. Here are its 3 constituent documents:
- Certificate of Incorporation
- Operating Agreement
- Articles of Association.
The first DAO to test the new legislation for strength already exists. We are referring to the Admiral DAO. The latter incorporated its own Shipyard Software Company in the republic to develop decentralized exchange software.
DAO incorporation in the Marshall Islands
Decentralized autonomous organization incorporation in the jurisdiction consists of several stages:
- Choosing a unique name and a non-profit purpose for your blockchain DAO.
- Operational agreement preparation by at least 3 founding members (amendments to the Operational Agreement may be introduced anytime after the organization has been set up, and at the first stage an agreement template may be used to speed things up).
- Local regulator shall subject founding members and owners holding at least 10% shares to the corresponding KYC procedures.
- Blockchain entity’s founding members shall sign the Operational Agreement draft, the Certificate of Incorporation, and the foreign investment license and submit the said documents to the corresponding regulatory authority.
- If all documents are in order, the regulator shall approve the LLC’s articles of association and send it to the founding members.
Why the Marshall Islands is your jurisdiction of choice to incorporate a decentralized autonomous organization
The republic not only boasts a unique regulatory framework with no rivals anywhere else in the world, but also offers a number of DAO incorporation benefits:
- it is not subject to the US federal laws and at the same time enjoys access to the US postal services and military protection
- Marshall Islands dispose of reliable US-oriented banking and financial systems and flexible legislative procedures keeping pace with developing markets
- jurisdiction boasts a loyal tax legislation providing for tax-exempt foreign-sourced income
- mixed legal system of the United States and Great Britain may be used, including certain customary laws and local legislation
- simple and easy customization, with only 3 founding members (either legal or natural persons) necessary to incorporate a DAO
- fast registration process, with up to 3 weeks necessary to establish a company and 2 weeks to get a special license therefor
- affordable DAO setup costs.
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What are DAOs?
A decentralized autonomous organization (aka DAO) is a blockchain company or entity, often governed by its own crypto tokens. Any buyers and holders thereof may vote on important DAO-related issues using a blockchain technology.
It is common practice for decentralized autonomous organization members to use smart contracts instead of traditional corporate structures. It provides for effort coordination and resource usage necessary to achieve common goals. In a nutshell, smart contracts are like self-initiating software performing specific functions under certain conditions.
DAOs are appealing to many crypto and blockchain businessmen, who strive to make their dream real. In 2016, the first DAO experiment ended in failure. The blockchain project’s technical vulnerability cost the company founders as much as USD 50,000,000. This does not stop the blockchain companies like Aragon, Colony, MakerDAO, to name a few, from going on with DAO experiments.
According to DAO supporters, decentralized autonomous organizations provide for more impartial companies compared to those managed by humans.
Company leaders may at times make unilateral decisions that are not necessarily correct, yet influence the whole company. DAOs are here to easily resolve the issue. With decentralized autonomous organizations, concerned parties (i.e., investors) enjoy direct control over the blockchain company’s operation methods.
DAO operating principles
You may program certain company or entity management rules for using DAOs at the very start.
Ethereum smart contracts make the foundation for DAOs to operate. They may be programmed to perform certain tasks only under certain conditions. The above smart contracts may also be preset to automatically perform standard company tasks, e.g., funds disbursement only after a certain investor share has agreed to finance the project.
The common belief is that a DAO is an instrument to secure democracy. Interested parties may vote for adding new rules, amending them, or expelling a certain company member. These are just several examples out of many. We should remember that no changes are possible in a DAO unless the necessary number of company members vote for them.
Here are DAOs’ main principles:
No hierarchy. Decisions are typically made by interested parties and not company leaders or members.
Transparency. Open source code is freely available, and any person in the blockchain industry is able to view the history to see how and why certain decisions were made.
Open access. Anyone with an Internet access may hold or purchase DAO tokens and is thus authorized to be a part of DAO decision-making.
Democratic changes. Investors are free to change or amend DAO rules, they just need to vote for new proposals and/or suggestions.
Recruiting. In theory, DAOs may outsource experts, as some tasks may be performed by certain people only. An autonomous DAO vehicle may in theory call a repairman using the damage information from its sensors.
Key issue decentralized autonomous organizations face
DAOs haven’t yet become mainstream due to security issues. This is actually why the very first experiment failed. A code error resulted in the DAO’s funds having been siphoned off by some low-down users. Onlookers watched malicious users slowly depleting The DAO’s funds, but were powerless to stop them. The hacker followed the rules as they were deploying.
The DAO is basically a code impossible to stop, and this may pose a problem. The DAO rules are hard to change once they have been deployed in the Ethereum blockchain. The structure does not allow any natural or legal persons to change the organization without the community’s consensus. It may also create some issues, with severe difficulties with closing any structure gaps among them. Such actions may result in a potential theft, money loss, or have other negative effects. You are welcome to contact the International Wealth experts at firstname.lastname@example.org if you feel like incorporating a decentralized autonomous organization, be it in the Marshall Islands or any other jurisdiction. With us, your blockchain business is well protected and confidential.