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The arrest of key members of a prominent Chinese Blockchain Decentralized Autonomous Organization (DAO) on charges of criminal activities has raised many questions in the cryptocurrency world. This situation indicates a significant obstacle for the developing Blockchain technology. The main accusation against DAO members is that China considers the issuance of DAO tokens as part of a membership incentive system that can be considered a violation of the law.
Legal Risks Faced by DAOs
This significant event prompted the law firm Mankiw to conduct a comprehensive investigation to uncover the truth and enhance legal compliance in the industry. While DAOs symbolize a free-spirited community with unlimited collaboration and distribution based on anticipated work for many Blockchain practitioners, this example draws attention to overlooked legal risks, especially those involving criminal offenses.
Known for their decentralized operational models, DAOs allow members to participate in the decision-making process transparently without any central authority. However, certain DAO operations involve legal and criminal risks. Firstly, donation campaigns that may involve the sale of community points or NFTs can include fraudulent financial transactions, illegal securities issuance, and pyramid schemes.
DAO tokens often serve various purposes, including fundraising, voting rights, and income-based payments, all of which are occasionally deemed illegal under Chinese laws.
Secondly, due to the decentralized and international nature of DAOs, they pose additional legal risks. Some DAOs employ a tiered reward system to attract users and enhance their impact. These practices resemble pyramid schemes, which are illegal in China.
Do We Need More Regulations?
The legal risks faced by DAOs in China have become quite apparent as a result of the strict measures taken by the government. This incident serves as a reminder to the industry about the importance of compliance and regulation for the long-term development of Blockchain technology, cryptocurrencies, and DAOs.
