Regulation of Financial Protocol DAOs. Addressing the problems of decentralization and AI governance.

Abstract

Abstract This article examines the legal challenges of regulating Decentralized Autonomous Organizations (DAOs) within financial markets, particularly those offering decentralized financial (DeFi) services. After classifying DAO in Social DAO, Investment DAO and Protocol DAO, it discusses the ambiguous legal status of DAOs, their decentralized and autonomous governance structure, and the obstacles these pose to traditional regulatory frameworks. DAOs are typically governed by smart contracts and operate on blockchain, complicating regulatory enforcement due to their decentralized, non-hierarchical structure. Additionally, the integration of artificial intelligence (AI) in DAOs introduces further complexities regarding accountability and liability, as AI lacks legal personhood. The paper reports innovative regulatory approaches, including “embedded supervision”, which integrates monitoring mechanisms within DAO operations, and “polycentric co-regulation”, which involves collaborative regulatory input from industry stakeholders. Ultimately, it suggests that Protocol DAOs might be more suitably considered as “infrastructural assets” rather than traditional business entities, encouraging voluntary compliance and adapting standards to their unique, decentralized nature.