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An adapted version of this article first appeared in The IPKat on 31 August 2022.

Decentralised Autonomous Organisations (DAOs) are a new type of quasi-corporate entities, existing with the use of blockchain and smart contracts. Although conceptually the same, DAOs vary significantly in their organisational structure, their code, goals, functions and governance. The idea of DAO is not that new with the most well-known DAO (uninventively called “The DAO”) dating back to 2016.

The emergence of DAOs is a yet another clever way of using the blockchain technology, though this time it is to achieve corporate governance goals. DAOs do not have a board of directors responsible for the decision-making but instead they are managed by consensus of their members. Rather than purchasing shares in a company, each member is issued with tokens which grant voting rights in the DAO. All of the functions of a typical organisation can in theory be replaced under a DAO by a set of defined conditions. If the conditions are met, the program coded on blockchain will carry out a particular action.

Enthusiasts think that DAOs provide democracy and transparency often lacking in traditional corporate structures. But is it really so? The use of blockchain and smart contracts in the creation of DAOs has its pros and cons. On the one hand, blockchain offers a certain element of transparency, however, on the other hand, the use of smart contracts lacks flexibility. Once something is encrypted into a smart contract, there is no mechanism for alteration – only by scraping one contract altogether and replacing it with a new one.

There is no prize for guessing, DAOs start to present a headache for lawyers and governments around the world. Unlike private individuals or companies, DAOs are not legally recognised in the UK. As such a DAO does not have separate legal personality which, strictly speaking, means that it is unable to own property or enter into contracts in its own name. The lack of clarity around their legal status mean that many DAOs utilise a limited liability company as a form of “centralising” tool. For example some states in the USA have adapted limited liability companies to recognise DAOs, and provide for the entity to have legal obligations and ensure limited liability protection for its members, but it is worth noting that these are not “true” DAOs.

So what are some of the IP-specific issues that are relevant to DAOs?

 

Ownership of IP

In a recent curious example, Spice DAO paid $3 million for an original 1975 copy of the Dune bible by Alejandro Jodorowsky. Spice DAO purchased the piece with a plan to make the book free to the public as well as to produce a limited animated TV series. However, it turned out that the community members misunderstood the copyright and thought they could produce an adaptation of the book whilst, in fact, the purchase of the physical book did not mean the purchase of the underlying copyright of course. Not to mention the fact that the book was already available to the public long before Spice DAO’s involvement!

The above example, at the very least, shows that a DAO can own physical property (e.g. a book) even if the ownership of the underlying IP rights is currently uncertain. Indeed, there are many DAOs that have been created with the purpose of owning property rights, including real estate, such as the Indaod.io, which has recently announced plans to purchase and manage a collection of highly desirable vacation properties.

One might think that there should be no issue for a DAO to own intellectual property if it decided to make IP ownership its goal and if its members voted to own certain IP rights.

 

Authorship and Inventorship

The participation of DAOs in the actual creation of intellectual property will largely depend on the clarification of DAO’s legal status. DAOs may (at least in certain jurisdictions) be recognised as separate legal personalities, alongside companies. If DAOs were to be recognised as corporate entities, then the law that currently applies to the companies would apply to DAOs.

The Copyright, Designs and Patents Act 1988 (“CDPA”) states that the “author” of a work is the person that creates it. In addition, the CDPA recognises joint authorship and the authorship of computer-generated works. In each case, there must be a named “person” or “persons” who is to be called an author. A company may, however, own a copyright in an author’s work. Such ownership sometimes arises automatically when a work has been created in the course of employment. In all other cases, however, a copyright will need to be assigned in writing in order for the company to own the rights. Summing up, if a DAO was to be legally recognised as a form of “company”, it could own the copyright in a work and its members could, as individual authors, be regarded as joint authors if they have jointly created a copyright work.

By analogy, the position of DAOs in relation to trade marks will depend on their legal status. For instance, if a DAO has commissioned a member to draw its logo, it could obtain a copyright in that logo and then register it as a trade mark with the IPO. However, it is worth noting that the UKIPO has the ability to reject a trade mark application if there is doubt as to the legal status of the applicant and might seek confirmation that the applicant has the necessary standing to hold property.

Similarly, with regard to patents, under the Patents Act 1977, an inventor means the “actual deviser of the invention”, and the owner of a patent can be a company. Therefore, although a DAO would unlikely be considered an “inventor”, a DAO could own a patent to its members’ invention, who will be named an inventor or joint inventors (as the case may be) on a patent application. As such, VitaDAO is an interesting example of a biotech DAO that was created with the purpose of funding early stage longevity research and drug discovery. It remains to be seen whether VitaDAO and other R&D DAOs will in fact succeed in their ambitious goals.

 

Law Commission’s scoping study

In the UK, the Law Commission has been recently asked by the Government to carry out a 15-month scoping study into DAOs “to explore and describe the current treatment of DAOs under the law of England and Wales and identify options for how they should be treated in law in the future in a way which would clarify their status and facilitate uptake”. The Commission will consider different treatment for different types of DAOs depending on their structures, as some DAOs are more/less “autonomous” or more/less “centralised”. The project is currently at an initiation stage but the work will start any time soon. Although the Commission has not been asked, at this stage, to make formal recommendations for law reform, its eventual opinion will likely lay the foundation for future legislative changes, should these be considered necessary.

 

Conclusion

DAOs have undoubtedly made some noise in the media sphere but are they here to stay? Will they be the next step in the evolution of corporate entities, eventually replacing the traditional corporate structures, or are they simply much ado about nothing? Only time will tell. There are obvious challenges such as what happens if a DAO is “defective” (as occurred in relation to “The DAO” mentioned above, when a vast sum was removed from it by parties exploiting the logic of the smart contract)? Owners of tokens in such DAOs might wish to have recourse under existing law to redress any losses. This seems at odds with the basis of a blockchain where its rules and functions are coded and are transparent, but shows the difficulty in recognising DAOs as legal entities.

In our opinion, it is preferable for Governments to embrace DAOs as a discrete form of corporate entity sooner rather than later. Identifying satisfactory regulatory models will likely be one of the biggest issues faced, and indeed as is clear from the above some jurisdictions have already started to look into this.

For further information regarding this topic, please contact Simon Miles, Marianna Ryan or any member of the Intellectual Property team.

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