This is the second of a two-part analysis of how Canada could provide for the legal recognition of DAOs (see part one here). Here, I discuss whether DAOs fit the cooperative or corporate business forms.
DAOs Are Not Corporations
While DAOs are often analogized to corporations, there is an imperfect fit as corporations are neither decentralized nor autonomous. In Canada, incorporation is done at either the federal or provincial level, with federal corporations formed under the Canada Business Corporations Act[1]. For DAOs, incorporation would offer advantages such as limited liability, preferential tax treatment and perpetual existence. But incorporation also presents many complications: Inter alia, corporations are required to abide by public disclosure rules and complicated taxation procedures. Expecting a DAO with fluid membership and decentralized governance to abide by such statutory restrictions is unrealistic.
Provincial incorporation is done under provincial corporate law statutes for entities conducting business in that province. In theory, each province has the power to set its own corporate law, but in practice, most provinces have either closely followed or been influenced by the federal CBCA.[2] Therefore, for DAOs seeking provincial incorporation, there would be similar complications as with federal incorporation. Fundamentally, DAOs do not fit the corporate form.
DAOs Are Not Cooperatives
The cooperative form superficially fits the needs of the DAO. Cooperatives are business forms controlled and owned by its members to meet a common need. In Canada, cooperatives are available both federally and provincially[3]. The fundamental features of federal and provincial cooperatives are the same: “One person, one vote”, open and voluntary membership, and limited payouts (whether interest or dividends) on member shares.
As defined by the International Co-operative Alliance, cooperatives worldwide share seven design principles.[4] Many of these principles mirror the values of the prototypical DAO: (1) Voluntary and open membership, (2) democratic member control, (3) autonomy and independence, and (4) member economic participation. But other principles seem out of place with DAOs: (5) Education, training and information, (6) cooperation among co-operatives, and (7) concern for community. Without supporting the fundamental cooperative values, DAOs are a superficial fit for this form.
While the democratic control of cooperatives seems to fit the mode of governance for most DAOs, there is a catch: Cooperatives follow the “one person, one vote” rule. This is not compatible with the majority of DAO voting mechanisms, which opt for token-based governance where those who own more have greater sway in voting.[5]
Concluding Thoughts
Legal recognition would help popularize the DAO. Currently in Canada, it is unlikely that any current structure would fit the DAO. But tinkering with existing business forms may offer a solution: The LLP (expanded beyond regulated professionals). Such a form would mimic the American LLC, which was adapted in Wyoming, Vermont and Tennessee for DAOs.
This conclusion assumes that the DAO as currently idealized – decentralized and autonomous – will continue in that form. But crypto evolves fast. Will DAOs of the future become CSOs (centralized subordinate organizations), in effect, digital corporations? It is a development which prominent voices in crypto warn against, though others seem less concerned. Or maybe the causality will be flipped – will DAOs disrupt the corporate form due to the (alleged) superiority of token-based governance and community-driven control?
Whatever the evolution, at present providing the benefits of Canadian (federal or provincial) law to DAOs would be a good first step.
[1] Federal jurisdiction over incorporation stems from Parliament’s general power to make laws for the peace, order, and good government of Canada. Enacted in 1975, the CBCA was designed to enhance Canada’s market efficiency and competitiveness. To keep pace with the corporate marketplace, the CBCA has been amended several times, most recently in 2022. The ability to federally incorporate in Canada differs from American practice, where incorporation is only governed at the state level.
[2] Camden Hutchison, “Corporate Law Federalism in Historical Context: Comparing Canada and the United States” (2018) 64:1 RD McGill 109.
[3] For example, cooperatives in Ontario are governed by the Co‑operative Corporations Act.
[4] The ICA explains that these principles are “guidelines by which co-operatives put their values into practice”.
[5] A few DAOs abide by the “one person, one vote” rule, but this is not the norm. For example, Kleros launched the Proof of Humanity DAO, which gives each user the same voice and voting power and describes the DAO as “democracy in its truest form”.