As the fight for regulatory clarity for cryptocurrency continues at the federal level, a bill aimed at providing some of that clarity at the state level emerged this week. AB 1229, introduced by California Assemblymember Matt Haney, would create a business entity structure for DAOs. The structure, known as a decentralized nonprofit organization (DNPA), would provide a framework for DAOs to establish a legal entity, pay taxes, and limit their participants’ liability.
Miles Jennings, general counsel at the venture firm a16z, which sponsored the bill, conducted extensive research for AB 1229. “There’s a lot of uncertainty in this space,” said the lawyer, who previously worked for the multinational law firm Latham and Watkins before joining a16z. “What [entrepreneurs] need is certainty so that they can plan on how to build and spend less time worrying about these legal issues.”
AB 1229 comes at a time when government regulatory and enforcement actions have dominated the conversation about cryptocurrency in the United States. Last year, the Commodity Futures Trading Commission (CFTC) filed an enforcement action against a DAO’s token holders for “illegally offering leveraged and margined commodity transactions in digital assets,” according to a September 2022 press release.
The agency’s action sparked outrage in the crypto community, as those who had voted in governance elections began to wonder if they would be held accountable for the DAO’s actions. AB 1229 may provide some of the clarity that DAO participants seek, as well as limit their liability based on the actions of their affiliated organization.
While the national debate over securities law and cryptocurrency has been heated, Jennings believes that passing AB 1229 is more feasible. “This is a problem that is a little bit more tangible and ready to be solved because there are existing legal structures that can be modified,” he explained. “It’s not quite as difficult as, say, changing securities laws.”
To be sure, Jennings stated that the newly proposed bill would not apply to all types of crypto organizations that use a token. He stated that AB 1229 would be a good fit for protocols and blockchain networks that sought to control autonomous software through voting. As examples, the general counsel mentioned the exchange Uniswap and the scaling solution Optimism, both of which a16z has invested in.
AB 1229 would not be appropriate for other organizations, such as investment groups based on a blockchain token or other types of social clubs, he said. Jennings also stated that traditional businesses could not be considered a decentralized nonprofits.
“You can’t put in a big management team 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 members of a DAO that has been legally recognized by California cannot expect to profit financially from their token ownership. “There are other ways to provide value to token holders that don’t look like dividends,” Jennings explained.
The general counsel mentioned how a UNI token could potentially make providing liquidity more profitable. Alternatively, using the Aave token, a lending protocol, to backstop risk via the Safety Module.
AB 1229 passed through California’s 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 California’s lower legislative branch and be sent to the State Senate. Jennings believes California’s governor, Gavin Newson, could sign the bill in less than a year. “You’re probably looking at six to eight months total,” he said, assuming the bill passes the California State Legislature.