DAOs are a staple of Web3.
In order to understand DAOs, it is significant to know the concepts of Web3 and blockchain technology. Web3 is the thirdgeneration iteration of the world wide web. The premise of Web3 was first coined by Gavin Wood, the founder of the bitcoin-based software, Ethereum. [1] Gavin realized the vision of achieving a fairer and more equitable internet by shifting power from the tech-super giants (Google, Apple, Microsoft, Amazon, and Facebook) to the web users by means of a new decentralized platform. In essence, Web3 is envisioned to function on decentralized systems such as blockchains, cryptocurrencies, and NFTs (Non-Fungible Tokens).
A blockchain assembles data into blocks with each group holding a specific set of data. These blocks have precise storage capacity, and once a block is complete, a new block is created that links the new block with the previous block, hence creating a chain of blocks, or blockchain. [2] Each block is with a time stamp of activity that is recorded relating to the block. This provides an unchangeable linear classification of events that can form a clear timeline known as a ledger of activities or transactions. Blockchain technology is decentralised and therefore no activity that has been recorded on a ledge can be overturned or removed.
What is a DAO?
Decentralized Autonomous Organization [DAO] is gaining popularity in the block chain world. Can you imagine a way of organizing with other people around the world, without knowing each other and establishing your own rules, and making your own decisions autonomously all encoded on a Blockchain? Well, DAOs are making this real[3]. DAO are decentralized independent entities that exist and functioned by their code. Ownership in a DAO is represented using tokens which are like stocks in regular organizations.[4] Since DAO exists on the blockchain, its work protocol and voting are completely transparent.
DAOs form a constitutive and defining element of Web3.[5] It is the cornerstone of Web3 as it aims to dismantle central authority by means of a community-led entity. It is a blockchain-based organisation that is a communitycontrolled body which is not controlled by any central entity, such as a government or a company where anyone who is involved can have ownership and engage in the decision-making. DAOs help in the collective ownership of Web3 platforms by using tokens, just like using shares to own a company. Thereby, DAOs can be defined as community-centric organizations that coordinate and organize themselves through self-enforcing rules encoded on a public blockchain. [6]
Subsequently, DAOs help in achieving the goal of Web3, i.e., democratized control over the internet. The financial transactions and rules of a DAO are recorded on a blockchain. This eliminates the requirement for a third party to be involved in a financial transaction, simplifying those transactions via smart contracts. A DAO’s firmness is a smart contract.
In practice, DAOs use agreed-upon smart contracts that automate decentralized decision-making over a pool of resources. In simple terms, smart contracts are code that is installed on and executed by a blockchain. Users with tokens (NFTs) would vote on how the resources would be spent, and the code would perform the voting function. Thus, DAOs are highly autonomous, transparent organizations, which may aid in curbing the power concentration in the hands of the tech oligarchs.
People define many Web3 communities as DAOs. These communities all have different levels of decentralization and automation by code.[7] Presently, DAOs are still a highly experimental governance model, as both the tools and the science behind them are still evolving through the research and development of different DAO communities.
A DAO, like a corporation, requires support in fundamental organizational functions such as:
- Community Tools for enabling community conversations
- People for administration of talent and knowledge
- Public relations and marketing to promote contributions and reputation.
- Business Development for laying the groundwork for a DAO, including governance, member engagement, and voting.
- Treasury Management for managing DAO’s money, tokens, and remuneration for DAO members.
- Main Product for Front end, analytics, and design
Engineering for managing DAO access.
A DAO is like a traditional corporation where it is a separate entity and has its own bank account, however in DAO it has a cryptocurrency wallet and the contact address. [8] But the main difference makes DAO autonomous is that in contrast to the traditional corporations it is managed by itself which is its code rather than by human management.
Pros & Cons of DAOs As A Company Structure
Forcing The Middleman Out – One of the major pros of a DOA as a company structure is that regardless of function, DAOs are primarily managed by its members. They do not need to go via banks, general partners, or other institutions to invest in startups or other assets. Corporate Transparency – In addition to this, as stated above, users have full access to and influence over organizational processes and decisions, making the corporation’s transparency better.
Inefficient Organisation – However, there are a few cons as well, in the case of DAOs, each decision has to be voted on by the community, though there are some systems that allow people to elect representatives.
Value Of Token Can Be Volatile – When people lose faith in the organisation, the value of its token falls, rendering its pool of capital worthless. Misaligned incentive structures can attract speculators, lowering the community’s value.
Potential Threat Of Centralization – Initial fundraises can centralize governance tokens in the early cohort of funders, defeating the purpose of a community-run project.
Gaming DAOs – A New Way of Coordinating Gaming Communities.
A trending community in the DAO world is a crypto game which is the next generation of gaming. These games allow you to earn digital assets while gaming, thus rewarding you financially for your participation. For example, some games reward players with their in-game currency which can be exchanged for other cryptocurrencies, or one can use it for buying things and characters that can be sold in Marketplaces. The play-to-earn model has become very popular in the past few months and more and more gamers are joining crypto gaming communities nowadays.
Just as “play-to-earn” has the potential to redistribute ownership of a game between its players and its creators, DAOs have the potential to redistribute ownership of a game amongst an entire community – be it the players, the game’s creators, its investors, community builders, or other participants.[9] Games based on blockchain are using methods of decentralization by game coding and smart contracts. [10] Blockchain technology also allows interoperability between games, player-based economies, and monetization gaming models.
The main features of the blockchain game include Real digital ownership, Non-Fungible Token (NFT), interactive ability, safety, decentralized exchange, and a player-oriented economy. [11]Blockchain gaming represents one of the fastest-growing segments of the nearly $200 billion global gaming industry. Abu Dhabi is partnering with a crypto and blockchain business set to support the emirate’s gaming sector. [12] It will help game developers tokenise in-game assets, allowing gamers to generate revenue through trading in-game NFTs. Abu Dhabi Gaming ensures that the emirate is at the leading the global gaming industry, providing gaming firms in Abu Dhabi with the tools they need to thrive. The partnership will add value for both gaming businesses and gamers across the world from Abu Dhabi by integrating blockchain platforms, digital assets, and non-fungible tokens (NFTs) into the gaming industry.
Laws Regulating Virtual Assets in The UAE
UAE has notably embraced this evolving science to become one of the leading hubs for Web3 communities. UAE is increasingly becoming the destination of choice for big companies in the crypto industry due to the recent regulations coming in. The UAE plans to make the region a global force in crypto and the digital economy in the next few years.
1.Securities and Commodities Authority [SCA] Regulations
The Securities and Commodities Authority (SCA) has signed agreements with some of the UAE’s flagship free zones; DMCC, DAFZA, and DWTC making it accessible for crypto-related companies to get a license, set up, and operate in the country.[13] SCA Regulation applies to most forms of Crypto Assets whether Securities or otherwise, which are listed and available for trading on an organised market. This Regulation applies generally to SCA regulated “Financial Activities” in respect of Crypto Assets in the UAE and would include, promotion and marketing, issuance and distribution, advice, brokerage, custody and safekeeping, fundraising, operating an exchange. [14]
SCA regulations will only apply in specific circumstances. Primarily, this will be where the Crypto Asset:
- is available for exchange on an organised market and promoted or the subject of financial activities in the UAE, and not on a purely transferred peer to peer basis and
- is not otherwise regulated by the UAE Central Bank (i.e., falling within “Regulated Commodity Tokens” and not excluded by the Regulation).
The SCA issued Decision No. 23 of 2020 concerning Crypto Assets Activities Regulation (the “CAAR”). [15] This regulation aims at regulating the offering, issuing, listing, and trading of crypto assets in the UAE and related financial activities.[16]
The CAAR defines a crypto asset as “a record within an electronic network or distribution database functioning as a medium for exchange, storage of value, unit of account, representation of ownership, economic rights, or right of access or utility of any kind, when capable of being transferred electronically from one holder to another through the operation of computer software or an algorithm governing its use”. The CAAR is designed to regulate and license key aspects of dealing in crypto assets, from issuance and promotion thereof, provision of crypto asset custody services, operating exchanges and fundraising platforms. The CAAR is not intended to include items regulated by the Central Bank such as currencies, virtual currencies, digital currencies, stored-value units, payment tokens and payment units(s).
The CAAR applies to any person who:
- promotes, offers, or issues crypto assets in the UAE.
- provides crypto asset custody services, operates an exchange for crypto assets or operates a crypto fundraising platform in the UAE; and
- Carries on any other financial activities in the UAE in relation to crypto assets. Financial activities which are regulated in the UAE include promotion and marketing, issuance and distribution, advice, brokerage, custody, and safekeeping, fundraising, and operating an exchange.[17]
The CAAR does not apply to:
- Crypto assets issued by the Federal Government, local Governments, Governmental institutions and authorities or any companies that are wholly owned by such entities.
- A currency, virtual currency, digital currency, unit of stored value or any other payment unit issued through a system licensed, approved, or required to be approved by the Central Bank pursuant to its regulations that are issued from time to time; and Securities held in de-materialised form in a clearing or settlement system, by a custodian or depository and Securities not issued as crypto assets but managed using an electronic record keeping method controlled by the offering person or its approved registrar, unless qualifying as crypto assets pursuant to the provisions of the CAAR.[18] UAE has notably embraced this evolving science to become one of the leading hubs for Web3 communities. UAE is increasingly becoming the destination of choice for big companies in the crypto industry due to the recent regulations coming in. The UAE plans to make the region a global force in crypto and the digital economy in the next few years.
Law No. (4) of 2022 – Regulating Virtual Assets in the Emirate of Dubai [VARA]
Law No. (4) of 2022[19] applies to the Virtual Asset services provided in all zones across the Emirate, including Special Development Zones and Free zones but excluding the Dubai International Financial Centre [DIFC]. VARA lays down guidelines that include several models, like testing and scaling products and services. VARA has legal personality, financial and administrative autonomy, and the legal capacity required to undertake all acts and dispositions that ensure the achievement of its objectives. VARA is affiliated with the DWTC Authority. VARA is responsible for licensing and regulating the sector across Dubai’s mainland and the free zone territories (excluding DIFC). It will provide a full range of services in coordination with the Central Bank of UAE and the SCA. It is authorised with organising and setting the rules and controls for conducting virtual assets-related activities including management services, clearing and settlement services, in addition to classifying and specifying types of virtual assets.
The law repealed any provisions in other legislation which contradicted or conflicted with the act. The act defines ‘virtual assets’ as “a digital representation of value which can be digitally traded, transferred, or used as an exchange or payment instrument or for investment purposes”; this, therefore, would include cryptocurrencies, NFTs, or any other virtual asset as determined by VARA. The Virtual Assets Law (VAL) applies throughout the Emirate of Dubai and the various special development and free zones (with the exception of the DIFC/ Dubai International Financial Centre) and does not regulate virtual asset services on the federal level. [20]
VARA is introduced to ensure maximum transparency and cooperation for investors. According to the VAL, VARA will have a wide range of responsibilities, including regulating the operation and management of virtual asset platforms, service providers, and all that relates to virtual assets and authorizing exchange services between virtual assets and currencies or between one or more forms of virtual assets. All individuals who are subject to the VAL are obligated to fully cooperate with VARA, including by submitting the required data and documents it needs to carry out its duties. Under the VAL, there is an express prohibition on any person in Dubai engaging in certain activities falling under VARA’s scope without VARA’s prior authorisation. These activities include operating and managing virtual assets platform services; exchange services between virtual assets and currencies, whether national or foreign; exchange services between one or more forms of virtual assets; virtual asset transfer services; virtual asset custody and management services; services related to virtual asset portfolios; and services related to the offering and trading of virtual tokens.[21] However, the VAL does not explicitly impose any obligations or regulations on those who invest in or trade cryptocurrency in Dubai, and it does not apply to companies that offer services related to virtual asset service providers that operate outside of Dubai. Contrarily, any person or legal entity that offers virtual asset services to consumers and businesses in Dubai can only do so if it is: granted a license by VARA; operates in Dubai; and has a trade license from the relevant commercial authority in Dubai. [22]
In order to obtain a license, the VAL stipulates that applicant must establish Dubai as the headquarters for their business and obtain a commercial business license from the relevant licensing authority in Dubai. The specific requirements concerning the licensing are expected to be covered by regulations released by VARA. Furthermore, VARA is also authorized to take a variety of actions and measures, including, under certain conditions, suspending the issuing of authorizations, the operations of any virtual asset service provider, and dealings with any virtual assets. These conditions and their corresponding penalties will be decided by the board of directors in the DWTC (Dubai World Trade Centre) in due course. Moreover, the VAL clarifies that VARA may suspend an authorization granted for a period of up to six months or may revoke the authorization entirely. Accordingly, it is seen that a breach of the VAL would manifest serious repercussions. Thus, it is demonstrated that VAL and VARA were adopted to grant protection to investors of virtual assets.
2. DIFC
The DIFC, an established free zone within the UAE, has its own regulatory framework for virtual assets under the jurisdiction of the Dubai Financial Services Authority (DFSA). [23] The DFSA is the regulator of the DIFC. On 25 October 2021, the DFSA revealed its regulatory framework in relation to investment tokens[24]. Any person carrying on certain activities relating to investment tokens, in or from the DIFC, will require DFSA approval or authorization. The activities include, without limitation, carrying on a financial service which relates to an investment token (for example, operating a facility on which Investment Tokens are traded or cleared), making a financial promotion relating to an investment token, making an offer to the public of an investment token, or applying for a security token to be admitted to the official list of securities.
An investment token will therefore, depending on the nature of the rights and obligations it confers, fall into one or more existing categories of a security or derivative.[25] The key difference however, between a conventional security or derivative and an investment token, is that an investment token confers rights on holders that are issued, stored, and transferred using cryptography and digital ledger technology.
The DFSA notes that key factors to take into account when determining whether a token is an investment token and, if so, which particular type (or types) of security or derivative it constitutes include what rights and interests are attributable to holders of such a token; who is required to meet the corresponding duties and obligations arising from such rights and interests; how such a token may reasonably be viewed by investors; how the token is described in offer documents or other marketing material and how such tokens are generally defined in other jurisdictions.[26] The DFSA is also formulating proposals for other tokens not covered by the investment tokens framework, which is expected to include, amongst others, cryptocurrencies, and utility tokens.
3. ADGM
Regulation of crypto assets in the ADGM is regulated under the Financial Services and Markets Regulations 2015 (“FSMR”). The regulator in this regard is the Financial Services Regulatory Authority (“FSRA”).
Under the FSMR, a “Virtual Asset” “means a digital representation of value that can be digitally traded and functions as (1) a medium of exchange; and/or (2) a unit of account; and/or (3) a store of value but does not have legal tender status in any jurisdiction. [27] [28]
A Virtual Asset is (a) neither issued nor guaranteed by any jurisdiction and fulfils the above functions only by agreement within the community of users of the Virtual Asset; and (b) distinguished from fiat currency and e-money”. [29] The Conduct of Business Rulebook (“COBS”) provides the rules pursuant to which an authorised person (as defined therein) can carry out a regulated activity in relation to Virtual Assets in the ADGM. [30] Thus, the crypto sphere presents an ever-changing regulatory landscape, both in the UAE and elsewhere. The rapid development of crypto assets and their various forms, together with the investment and AML risks arising thereof, will require a continual and evolving oversight by various regulators. [31]
UAE intends to capitalize on this futuristic avenue by means of its most recent crypto law, namely, Law No.4, 2022, or VAL. The introduction of VAL is an important legislative step in establishing a virtual assets market in the UAE. However, the market is still up-and-coming, and much remains to be seen as to how the VARA and VAL will interact with one another.
It is noted that DAOs are the future of organizations. Web3 and DAO communities are a lucrative option for the future of the internet, given the benefits of increased transparency, autonomy, democratic ownership, and protection of personal data. They are creating and opening doors of possibilities, but simultaneously questioning structures we currently have in place now. DAOs are decentralized and can be distributed across the globe to multiple jurisdictions that can create legal issues. The new regulations that are coming in and being implemented globally are in infancy and evolving constantly. With this ever-changing digital landscape there are several legal grey areas such as regional jurisdictions, intellectual property, and personal liabilities that requires legal assistance. Several other obstacles that DAOs need to navigate include contributor liability, real-world interaction challenges such as absence of standard legal entity and issues of security, governance as well as a lack of operational clarity. Despite these challenges, DAOs are believed to offer infinite opportunities in the times to come while constantly trying to iron out the difficulties posed to their functioning.
[1] accessed on 20 July 2022.
[2] accessed on 18 July 2022
[3] What Are DAOs And Why You Should Pay Attention, Forbes.com, accessed on 25 July 2022.
[4] Decentralized Autonomous Organization (DAO) Definition (investopedia.com)
[5] Mark Fenwick & Paulius Jurcys, ‘The Contested Meaning of Web3 & Why it Matters for (IP) Lawyers,’ January 27, 2022.
[6] S. Filipčić, ‘Web3 & DAOs: development and possibilities for the implementation in research and education,’ May 23, 2022.
[7] Introduction to Web3, https://ethereum.org/ , accessed on 26 July 2022.
[8] The Blockchain Democracy — DAOs, A New Organizational Structure | by Cryptonomy | Game of Life
[9] Gaming DAOs, Naavik.co, accessed on 26July 2022
[10] Examples of Blockchain Games (and how they work) (crowdbotics.com)
[11] Blockchain Games: Take Your Game to the Next Level (iteratorshq.com)
[12] AD Gaming to Drive Blockchain Gaming in Abu Dhabi Through Partnership With ATTARIUS Network (mediaoffice.abudhabi)
[13] SCA and DAFZA sign agreement to support regulating cryptoassets | News | Media Center | Securities and Commodities Authority
[14] Administrative Decision no. (11) of 2021 concerning Guidance for Crypto Asset Regulations
[15] The Chairman of the Authority’s Board of Directors’ Decision No. (23/ Chairman) of 2020 Concerning Crypto Assets Activities Regulation
[16] The Era of Crypto, Afridi & Angell, lexology.com, accessed on 26 July 2022.
[17] The Future of Crypto Assets Regulation in the UAE, Hadef & Partners, lexology.com, accessed on 26 July 2022.
[18] The Future of Crypto Assets Regulation in the UAE, Hadef & Partners, lexology.com, accessed on 26 July 2022.
[19] 2022 The Supreme Legislation Committee in the Emirate of Dubai
[20] < https://www.jdsupra.com/legalnews/dubai-passes-landmark-law-regulating-8666988> accessed on 21 July 2022.
[21] Dubai Issues New Virtual Assets Law | Addleshaw Goddard LLP
[22] Law No. (4) of 2022 – Regulating Virtual Assets in the Emirate of Dubai
[23] Laws & Regulations | Employment & Companies Law Dubai | DIFC
[24] Media Release, DFSA introduces regulatory framework for Investment Tokens, dfsaen.thomsonreuters.com
[25] DFSA – CONSULTATION PAPER NO.138 -Regulations of Security Tokens
[26] RMI 309/2021 General Module (GEN) Rule-Making Instrument (No.309)
[27] ADGM enhances guidance on regulation of crypto asset activities
[28] The Future of Crypto Assets Regulation in the UAE, Hadef & Partners, lexology.com, accessed on 26 July 2022.
[29] Regulation of Digital Security Offerings and Virtual Assets under the Financial Services and Markets Regulations
[30] Financial Services Regulatory Authority – Conduct of Business Rulebook (COBS)
[31] The Future of Crypto Assets Regulation in the UAE (hadefpartners.com)
