The rise of Distributed Autonomous Organizations (DAOs) is changing how organizations govern and operate. By using smart contracts, DAOs remove the need for traditional hierarchies, encouraging transparency and group decision-making.
Switzerland, known for its forward-thinking regulatory approach to blockchain and decentralized technologies, is often thought of as a suitable location for DAO formation. The country has a robust blockchain ecosystem, hosting over 1,224 blockchain companies — with nearly 900 based in the Greater Zurich Area.
But, is it genuinely possible to form a DAO in Switzerland, and do they exist in the legal sense? Read on to learn more.
What is a Distributed Autonomous Organization?
A Distributed Autonomous Organization (DAO) is a new organization that operates without centralized leadership. Unlike traditional companies with management teams and hierarchies, DAOs rely on smart contracts and blockchain technology to manage their operations. These smart contracts automatically execute decisions based on the rules set by the organization’s members, reducing the need for human intervention.
The main characteristics of DAOs include transparency, decentralization, and collective decision-making. Every member of a DAO has a say in the organization's governance, usually by holding tokens that allow them to vote on proposals. This decentralized approach ensures that power is distributed among the members, making DAOs more democratic and less dependent on a single authority.
Do DAOs Exist in Switzerland?
Before a DAO can operate in Switzerland, its legal status must be established. The key question is whether DAOs can have legal recognition under Swiss law. While DAOs governed by the laws of another country don't present significant legal challenges, DAOs that exist solely online — without formal incorporation under a specific country’s laws — pose legal uncertainties.
Legal Recognition Challenges
Few legal scholars have explored the recognition of online-only DAOs in Switzerland. The current practice is to attempt to apply existing Swiss legal concepts to these entities, but this can be complex because Swiss law doesn't specifically address DAOs.
Possible Legal Classifications
- Company Law Approach: Some experts suggest subjecting DAOs to existing Swiss company laws, classifying them as entities like limited companies (SA) or investment companies (SICAF and SICAV).
- Simple Partnerships Approach: Others argue that DAOs, which don't meet the formal requirements of traditional companies, should be treated as simple partnerships — a collection of contractual relationships rather than a formal company.
Alternative Solution: Recognition as Foreign Companies
Rather than forcing DAOs into existing company law frameworks, an alternative approach would be to recognize them as foreign companies under Swiss private international law. This would allow DAOs to maintain their decentralized structure while gaining legal recognition in Switzerland.
The Issue with Online-Only DAOs
A strict interpretation of Switzerland’s Private International Law Act (PILA) complicates matters for DAOs that exist only online. According to PILA (Articles 150 and 154), a foreign company must be validly constituted under the laws of a recognized state to be recognized in Switzerland. This requirement creates a challenge for DAOs that lack a formal connection to any state.
The Proposed Solution
One potential solution lies in the theory of functional equivalence, which suggests that a computer system could fulfill certain legal requirements in the same way a traditional legal entity would. Under this theory, the governing code of a DAO could be treated as its "law," and the digital space in which it operates could be considered its "jurisdiction." This approach would allow Switzerland to recognize online-only DAOs as foreign companies with rights and obligations despite their lack of incorporation under any state's laws.
Future Outlook for DAOs in Switzerland
Switzerland’s forward-thinking approach to blockchain technology and decentralized systems positions it as a key player in the future of DAOs. Although the legal framework for DAOs is still evolving, the country’s willingness to adapt existing laws and its strong blockchain ecosystem provides a solid foundation for these entities to thrive.
As blockchain technology matures and the global adoption of decentralized systems grows, Switzerland is likely to refine its regulations to offer more clarity and support for DAOs. The potential for regulatory innovation, such as recognizing DAOs as foreign entities or adopting the theory of functional equivalence, could lead to a more robust legal structure specifically tailored to DAOs.
Conclusion
Switzerland’s reputation as a blockchain-friendly hub makes it an appealing location for DAOs. However, the legal landscape remains complex, particularly for DAOs that operate solely online and challenge traditional corporate frameworks. While concepts like functional equivalence offer potential solutions, DAOs must still navigate uncertainties around legal recognition and compliance.
For organizations seeking to establish themselves within Switzerland’s regulatory framework, having expert guidance is crucial. SIGTAX, a company specializing in Swiss company formation and regulatory compliance, can assist with navigating the broader legal and tax requirements necessary for setting up a business entity in Switzerland.
While DAO-specific regulations are still evolving, our deep knowledge of Swiss legal structures and corporate formation can help ensure that your organization — whether traditional or decentralized — meets the necessary regulatory standards.
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