As the fight for regulatory clarity for cryptocurrencies continues at the federal level, a bill that aims to provide some clarity at the state level emerged this week. AB 1229, introduced by California Assemblyman Matt Haney, will create a business entity structure for the DAO. The structure, known as a decentralized non-profit organization (DNPA), will provide a framework for DAOs to establish legal entities, pay taxes, and limit the responsibilities of their participants.
Miles Jennings, general counsel at venture firm a16z, which is sponsoring the bill, did extensive research for AB 1229. “There is a lot of uncertainty in this area,” said the attorney, who previously worked for multinational law firm Latham and Watkins before. join a16z. “What (entrepreneurs) need is certainty so they can plan how to build and spend less time worrying about these legal issues.”
AB 1229 comes at a time when government regulations and enforcement actions have dominated conversation about cryptocurrencies in the United States. Last year, the Commodity Futures Trading Commission (CFTC) filed an enforcement action against DAO token holders for “illegally offering leveraged and margin commodity transactions in digital assets,” according to a September 2022 press release.
The agency’s actions sparked outrage in the crypto community, as those who had voted in government elections began to wonder whether they would be held accountable for the DAO’s actions. AB 1229 can provide some of the clarity DAO participants are looking for, as well as limit their liability based on the actions of their affiliated organizations.
While the national debate over securities and cryptocurrency laws has heated up, Jennings believes passing AB 1229 is more feasible. “This is a problem that is a little more real and ready to be resolved because there is already a legal structure that can be changed,” he explained. “It’s not as hard as, say, changing the securities laws.”
To be sure, Jennings stated that the newly submitted bill will not apply to all types of crypto organizations that use tokens. He stated that AB 1229 would be suitable for blockchain protocols and networks seeking to control autonomous software through voting. For example, general counsel mentions Uniswap exchange and Optimism scaling solutions, both of which a16z has invested in.
AB 1229 would not be suitable for other organizations, such as investment groups based on blockchain tokens or other types of social clubs, he said. Jennings also stated that traditional businesses cannot be considered as decentralized non-profit organizations.
“You can’t put a huge management team in place and then have a giant hierarchy,” he said. “This entity structure is not intended to be a replacement for the next Google, which will have 100,000 engineers.”
This is not to say that DAO members who have been legally recognized by California cannot expect financial returns from their token holdings. “There are other ways to provide value to token holders that are not as visible as dividends,” explains Jennings.
The general advisor mentioned how the UNI token has the potential to make providing liquidity more profitable. Alternatively, use the Aave token, a lending protocol, to mitigate risks via the Security Module.
AB 1229 passed the California Banking and Finance Committee this week and will be heard by the Judiciary Committee next week. If all goes well, the bill will pass through the lower branches of the California legislature and be sent to the State Senate. Jennings believes the governor of California, Gavin Newson, could sign off on the bill in less than a year. “You’re probably looking at a total of six to eight months,” he said, assuming the bill passes through the California State Legislature.