Utah DAO Act Gives Limited Liability Protections and Legal Entity Status to DAOs

Utah has become the first state to pass legislation recognizing decentralized autonomous organizations (DAOs), following the passing of the "Utah Decentralized Autonomous Organizations" Act (Utah DAO Act) on March 1, 2023. The move was described as a combined effort of the Utah Legislature’s Blockchain and Digital Innovation Task Force, led by Co-Chairs Senator Kirk Cullimore and Representative Jordan Teuscher.

The Utah DAO Act grants DAOs:

• legal recognition and limited liability protections, addressing the limitations of previous "LLC wrapper" approaches,
• establishes clear tax treatment,
• no implicit fiduciary duties for DAO participants,
• uses "Bylaws" to protect the anonymity of DAO participants and,
• incorporates technology gatekeeping to ensure that the DAO is indeed a DAO.

The Utah DAO Act passed both the House and Senate committees with narrow approval and robust discussion.

However, there were concerns and compromises. The three major concerns were:

1. Full “unaccountable” anonymity for the DAO base.
2. (Original) tax language that was “LLC flow through” inconsistent with potential state and federal tax realities.
3. Lack of ramp-up time to assure the Utah Division of Corporation is prepared to handle new applications.

The approach to compromise was as follows:

1. Accountability. Require each DAO to have a disclosed incorporator, while still allowing the DAO participant base to remain anonymous (and “redacted”).
2. Tax Language. We solicited the participation of the Utah Tax Commissioners’ office to propose acceptable tax language, which is indeed more nuanced and consistent with the tax complexities of a DAO (that language can be reviewed under Section 48-5-406 of the Bill).
3. Ramp-Up Time. We agreed to make the effective date of the bill 2024. We made that compromise so we would have another year to edit, adjust and assure the practical implementations can be made for a smooth adoption.