Picture this: A trustee receives an email notification that a “governance proposal” needs their vote, because the trust owns tokens in something called a DAO—and suddenly, they’re not just holding digital assets, they’re making decisions that could affect millions of dollars. Welcome to the new frontier where blockchain technology meets fiduciary duty.
What Exactly Is a DAO?
A decentralized autonomous organization (DAO) runs itself through blockchain technology instead of traditional hierarchical management. Think of it as a company without a CEO, board of directors, or corporate headquarters—just computer programs (called “smart contracts”) that automatically execute decisions based on member votes.
Here’s how it works: Members can acquire voting tokens through initial purchases, transfers from others, by earning or receiving them in ways designated by the DAO, or receiving them as rewards for participation. DAO’s decisions are made by token holders voting directly on the blockchain. Smart contracts automatically execute the decisions according to the DAO‘s programmed rules, without the intervention of any managers or executives who might slow things down or alter the decision. But this greater transparency also brings risks, because such decisions might not be easily overturned or align with an impacted entity’s desires and intentions.
Why would anyone want this? DAOs promise to eliminate bureaucracy, reduce costs, and give every participant a direct voice in decision-making. They can also remove the “politics” or other challenging dynamics from the process.
When Fiduciary Duty Meets Decentralized Governance
Where fiduciary duty in the traditional legal sense meets the use of decentralization for decision-making is where things get interesting—and potentially complicated. Traditional fiduciary law assumes someone is in charge, decisions can be appealed, and assets can be protected through established legal channels. DAOs may have the effect of turning these assumptions upside down.
Consider a trust holding governance tokens in a DAO. When a proposal emerges to radically change the organization’s investment strategy, the trustee faces a choice: Should they vote on questions put to the token holders? And, if so, how do they balance potentially competing interests, including their duty to act in the beneficiaries’ best interest if it conflicts with commitments that can come with participating in a DAO?
Unlike traditional corporate governance, where trustees can rely on professional management and regulatory oversight, DAO governance puts the burden directly on token holders. There’s no management team to defer to and often no clear way to reverse decisions once smart contracts execute them.
Estate Planning in the Digital Age
Death and DAOs don’t mix well. When someone dies holding DAO tokens, their estate representative faces a maze of technical and legal challenges. Many DAOs have no process for recognizing court-appointed executors or handling the transfer of governance rights. The deceased’s private keys—essentially the passwords to their digital assets—might be lost forever.
Even if the tokens can be accessed, traditional estate administration assumes assets can be identified, located, and transferred through established legal processes. DAOs often operate outside these frameworks entirely.
Family Investment Experiments
Family offices and individuals may start experimenting with DAO structures for collective investments—pooling money for real-estate deals or startup investments through blockchain-based voting systems. While this can democratize family-investment decisions, it creates murky questions about how a dissatisfied family member can extract herself from a DAO.
In the traditional closely held corporation, there are often buy-sell agreements or state statutes that provide remedies for minority shareholders who are subject to oppressive conduct by the majority. But token holders may find themselves with similarly illiquid assets and restrictive holding periods that make it difficult to escape oppressive conduct by the DAO majority.
Three Critical Challenges
The Knowledge Problem: When a trust holds member tokens in a DAO, this means the trustee must grasp how decentralized governance works—the voting mechanisms, the risks involved, and how decisions get executed through smart contracts. Simply assuming the technology will handle everything, or avoiding governance participation altogether, could constitute a breach of the duty of care. The fiduciary can’t just treat these tokens as passive investments when they carry active governance responsibilities.
Code as Law: Smart contracts execute automatically and are often irreversible. The DAO hack in 2016, where attackers exploited a coding vulnerability to steal $60 million in Ethereum, illustrates the risks. Unlike traditional governance, where courts can intervene or decisions can be appealed, smart contracts cannot just be “undone” once executed; instead, another separate contract—and all the required voting to support it—would likely be required to change an outcome. A DAO’s governance structure, and the “code is law” philosophy that often governs, might limit a fiduciary’s ability to protect trust assets or seek remedies.
The Accountability Void: Many DAOs operate without formal corporate structures, and members often remain anonymous. When things go wrong, there may be no clear person or entity to hold responsible. While some DAOs are registering as LLCs, many still operate outside this paradigm.
Practical Steps Forward
Until clearer legal guidance emerges, fiduciaries dealing with DAOs need to be proactive:
Due Diligence: A thorough understanding of blockchain technology is impractical for every trustee or fiduciary. Instead, “we should consider the diligence necessary for more traditional assets and whether that framework applies to this new technology, whether in whole or in part,” says Katherine Johnson, Chief Governance Officer of Storj Labs, a distributed storage company with its own digital token, STORJ. After all, trusts own all kinds of assets, including shares of or even entire corporations. How a trustee would determine how to vote a trust’s shares of stock can serve as an analogy for how to vote DAO tokens.
Professional Support: Ideally, one could engage blockchain specialists and technology counsel when dealing with DAO holdings. But technical experts in this space are rare. Instead, “find someone with the breadth of legal experience and good judgment who can appropriately apply traditional fiduciary and governance frameworks to new technologies,” says Johnson. “When seeking outside counsel or advisors, consider what type of clients they represent, how well versed they are with developing legal and regulatory frameworks, and their ability to communicate this knowledge in a way that is clear and reflects an understanding of past challenges and current trends.”
Insurance Review: Existing fiduciary or cyber liability insurance may not cover DAO-related risks. Review policies to understand whether smart-contract failures, governance disputes, or technical errors are covered.
The Bottom Line
DAOs represent a fascinating experiment in digital democracy and automated governance. But for fiduciaries, they also represent uncharted legal territory. As these organizations handle increasingly large sums and become more prevalent in investment portfolios, the need for clear legal frameworks and practical guidance will only grow.
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