Commentary-15
In broad terms, a fiduciary is a Person who is entrusted with the responsibility of acting in the best interest of another party and a fiduciary duty is a legal obligation that seeks to ensure said Person does in fact act in such a manner. Fiduciary duties are typically assigned ex ante on the basis of a specific role (director, trustee, etc.), or they are imputed ex post by a court to remedy for unconscionable conduct in a relationship of trust and confidence. Among examples of ex ante allocation of fiduciary duties is the corporate board members' fiduciary duty to a corporation and a trustee's fiduciary duties to the trust's beneficiaries. Thus, typically, a fiduciary is aware of the fact that they are acting as fiduciaries on behalf of another party and will accept legal and ethical obligations that flow from holding such a fiduciary position. Fiduciary duties include the duties of good faith, care and loyalty, and as these duties are open textured, objective or subjective standards are used to assess whether such duties have been violated.
However, as breaches of fiduciary duty entail significant penalties for Persons held liable, only egregiously self-serving or negligent conduct by Persons with control and wide discretion over a particular asset, information or set of decisions are found guilty of such breaches. Ordinary errors or failures that occur as part of the operation of a business are sometimes protected by some version of a 'business judgement' rule. In short, courts are reluctant to intervene in run-of-the-mill commercial decisions.
Blockchain Developers, like most open source developers, make their code available for public inspection and use code repositories such as Github. They do not have control over the ways in which their code, once written, is used or modified, nor can they usually impose a particular code change onto the users of the software once released. Every blockchain node must willingly upgrade their software in order to incorporate a particular code change. Unlike service providers who can force changes into an online platform without the consent of their user base, blockchain Developers have no power to impose any code change on the blockchain nodes.
Similarly, and as opposed to many commercial cryptocurrency exchange operators or custodial wallet providers, individual DAO Members and Participants do not usually have full control over the operations of the DAO, although they might have different degrees of influence to the extent that they can participate in the DAO's governance. It would be unfair to hold these Members and Participants collectively liable by default, for specific operations that they did not explicitly undertake or operations they did not agree to in the decision-making process.
Finally, the DAO's Legal Representative, unless specified otherwise, is merely an agent with limited and narrow discretion, appointed for undertaking only specific administrative or procedural tasks mentioned in the By-Laws, as opposed to taking decisions on behalf of the DAO. The DAO's Legal Representative should not be considered to hold any fiduciary duties towards any of the DAO Members or third parties affected by the operations of the DAO. Accordingly, to ensure that Developers, Members, Participants and Representatives of a DAO are not implicitly classified as fiduciaries arising from their conduct in relation to a DAO, the Model Law clearly states that a fiduciary relationship does not arise solely on account of their role.
The Model Law acknowledges that there may be circumstances in which a DAO wishes to assign fiduciary duties to specific Administrators, Members, or Representatives, and therefore provides for such a fiduciary position to be created via the DAO's own By-Laws or through explicit action of the fiduciary (Articles 15(1)(a)-(b)). This Model Law does not circumscribe the power of a judicial authority to impute fiduciary duties on a Person ex post on account of actual unconscionable behaviour, as opposed to such duties being imposed on any Person who holds a particular role. By clarifying the nature of DAO stakeholders' responsibilities and powers, we seek to provide greater legal certainty to these stakeholders.
Chapter 5
DAO specific provisions
Chapter 5 acknowledges that DAOs present new opportunities but also challenges. These opportunities and challenges must be addressed explicitly in the Model Law, and therefore do not have a counterpart in traditional corporate law rules. We have included provisions on Contentious Forks in the underlying blockchain (Articles 3(6), 16), DAO restructuring (Article 17), and DAO failure events (Article 18).
As to Article 16, unlike corporations which can act as one authoritative counterparty in their dealings by way of their separate legal personality, DAOs can experience Hard Forks pursuant to which multiple blockchain forks coexist, assets are duplicated and multiple instantiations of a DAO are created on different chains. During a Contentious Fork, there is an absence of an authority that makes a definitive choice of a chain and thus, there is a lack of an authoritative counterparty for a DAO. This is a particularly acute problem when dealing with Off-Chain Assets and Persons, as the existence of a single, authoritative counterparty is routinely expected.
Considering Article 17, the technological infrastructure of a DAO is subject to continuous change as a result of upgrades, modifications and migrations. The Model Law requires that DAOs maintain certain minimum standards throughout these changes to ensure that 'restructurings' do not subvert the standards and protections provided by this Model Law. These standards were introduced so as to allow DAOs to continue to have legal personality and their Members to retain limited liability as the DAO evolves.
In the short history of DAOs, we have witnessed a series of Failure Events. In Article 18, we address potential technical failures of DAOs rendering DAOs unoperational or frustrating a DAO's expected operation. Providing for legal personality and limited liability to DAOs under this Model Law, we consider it important to clarify that DAOs subjected to Failure Events do not lose such protections but only to the extent necessary to protect DAO Members and Participants from personal liability.
In contrast, there are standard provisions of business organization law that are deliberately not addressed by this Model Law. There are three main reasons for this.
First, as discussed in the Preamble, the technological infrastructure of DAOs recognized by this Model Law allow them to meet certain legal requirements and achieve certain policy objectives by way of functional and regulatory equivalence. Such legal requirements, which are often enshrined in provisions related to financial disclosures or share transfers, are automatically met by the technological guarantees provided by a blockchain-based system and do not need to be specified by law. For example, a corporate statute may include a provision that a share should be annotated with relevant information to trace ownership when the share is transferred to another entity (e.g., a trust), but the inscription of the transfer on a public, Permissionless Blockchain makes this information transparent by way of its ordinary functioning. This is a functionally equivalent outcome, as this inscription on a Permissionless Blockchain provides another means for tracing ownership other than an annotation on the face of a share or an electronic record update. As it is anticipated that a jurisdiction interested in adopting the Model Law will also facilitate such functional equivalence, such an example has not been addressed in this Model Law. At the same time, some of the articles in the Model Law strive to achieve regulatory equivalence, and might therefore introduce new regulatory requirements that may either complement or supplement traditional regulatory constraints. For instance, the article related to formation requirements (Article 4) seeks to achieve regulatory equivalence with typical corporate registration requirements.
Second, this Model Law provides a high degree of discretion to DAOs in how they establish their organizational, governance and capital structure (Chapter 4). As such, issues such as limitations on the transferability and negotiability of tokens, criteria by which Members are excluded from DAOs, internal and external dispute resolution mechanisms and threshold requirements for By-Law amendments, among other topics, are beyond the scope of this Model Law and left to the individual discretion of DAOs.
Third, there are typical provisions of corporate law that concern transactions that have yet to materialize with respect to DAOs. These include Members' agreements, the substantial sale of the DAO's Off-Chain Assets, conversions into DAOs, mergers with DAOs and liquidation and dissolution. New legislation, such as the State of Wyoming's legislation on decentralized autonomous organizations, addresses these provisions in the context of the jurisdiction's own corporate law.[^43] However, at this juncture, without more concrete examples of these transactions---or at least, efforts at achieving the same---the drafting of model provisions would be a largely speculative exercise and may ultimately not support the ends that Participants and Members seek to achieve through these transactions.