Introduction
Many existing and going on blockchain-enabled energy community projects are realized within open public blockchain ecosystems (Ethereum, Solana, Hyperledger Fabrik). Most notable going-on projects and platforms include ETHGlobal Energy Community DAO (Brussels), VTT’s EnergyDAO (Finland), Ta-DAO (the USA), and many others.
Blockchain is a shared, decentralized, and immutable digital ledger that stores transactions and enables the automated execution of “smart contracts” among parties without a central authority. The inherent features of blockchain are smart contracts protocols; tokenization; autonomous automatization; distributed ledger (DLT); transparency and trustlessnes. Realization of projects on public blockchain supports scalability and interoperability of different platforms existing within the same ecosystem based on the open smart-contract protocols.
Energy communities in DLT-enabled framework
A Decentralized Autonomous Organization (DAO) for energy communities uses smart contracts and blockchain technology to automate the governance, operation, and peer-to-peer trading energy, including from renewable sources, solar panels and battery storage. It can replace or supplement (on certain level) traditional centralized utilities with democratic, transparent, community-driven decision-making process.
Structuring of energy communities as decentralized DLT-enabled associations of consumers/prosumers: facilitates secure and automated energy transactions without intermediaries including peer-to-peer energy trading between consumers and producers (prosumers), peer-to-X, peer-to-grid; supports integration of decentralized smal-scale energy systems (DER, energy communities) and microgrids (enhancing balancing capacities); creates environment for cross-border energy communities (CBEC); enables real-time monitoring and coordination of energy supply and demand via IoT-technologies and AI-implants improving overall grid resilience and load balance.
Tokenization helps certify energy origin, equipment certification/registarion and monitoring its life-cycle (batteries, EV and colums), enables digital identities self-management (IoT meters, equipment, prosumers, transmition system/distribution system operators, balancing responsible parties, hardware manufactures/installers)
An energy community mirrored on the blockchain shall be subject to certain off-chain and on-chain rules and, therefore, requires appropriate regulatory response.
Since DLT dramatically reduces ability for the state to intervene while simultaneously supports endogenous creation of rules (Code as Law), open blockchain ecosystems that support smart-contract protocols and creation of DAO constitute an environment for modern form of lex mercatoria.
The challenge here is how to ensure convergence of legal facts within off-chain and on-chain realities, to resolve so called “synchronization problem”.
DAO are decentralized by nature of blockchain ecosystem – constitutionally resisting any central censorship. They are autonomous in the sense that DLT-ecosystem tend to eliminate any intermediary between members/token holders of DAO and on-chain third parties (and possibly off-chain constituencies).
Today DAO is a highly speculative concepts and recognition of legal personality of DAO (a purely on-chain concept) by traditional legal system remains highly controversial.
From community members perspectives the purpose is to enjoy benefits of the blockchain, while accommodate: limited liability of members, ability for DAO hold the off-chain property and enter contracts with off-chain third parties, transferability of membership tokens alongside with transfer of the off-chain property.
From the policy makers perspectives, the request for convergence is supported by the need to assure: adherence by communities to the certain rules and regulations, priority of the creditors claims over the off-chain and on-chain assets of the DAO.
The fundamental question regarding the legal concept of DAO is the recognition of the legal personality of DAO, governance and liability infrastructure of DAO.
Legal Developments in recognition of DAO concept
According to the existing bespoke laws, case law, and academic initiatives a decentralized autonomous association might be recognized by traditional law as: 1) a property or assets being subject of dispute between different cohorts of stakeholders claiming control over it; 2) an non-incorporated association (violating security regulations); 3) a sanctioned person/asset; 4) a debtor subject to the insolvency procedure; 5) a featured off-chain organization having its on-chain (blockchain) representation – for example an infrastructure facilitating decentralized decision making process, which is installed within the structure of traditional legal forms and subject to formal, incorporation process; 6) an on-chain association granted, which is not subject to formal state-sponsored off-chain incorporation but acquiring the status of legal person as a result of compliance with specified requirements (publishing of a governing smart-contract protocol of blockchain).
The Mantra DAO litigation commenced in the High Court of Hong-Kong is ‘a dispute as to the true ownership, management and control of the project, a “decentralized autonomous organization” (“DAO”)’.
The dispute occurred between Mantra DAO Inc., RioDeFi Inc. (the plaintiffs) and former RioDeFi Inc. employees (the defendants) over the control and ownership of on-chain DAO project. The plaintiffs Mantra DAO Inc. and RioDeFi Inc. claim the project, the DAO, belongs to them, that their assets where “misappropriated” by the defendants, who overtook the control over the DAO on-chain. The defendants argue the DAO should be controlled by assembly of the on-chain token holders, and not by a single off-chain entity and by its nature cannot be controlled by anyone.
The Hong Kong court granted the order requiring defendants to disclose the DAO’s books and records. The court acknowledged the novel nature of DAOs and the need to apply traditional legal principles to them. The case demonstrates the collision of two deviant comprehensions of DAO – as an asset and as an association or community.
In Tornado case OFAC sanctioned Tornado Cash, a blockchain DAO platform with no off-chain representation or registration. This case is discussing the nature of Tornado Cash as a platform, service, and open-source self-governed software.
The OFAC designation identified Tornado Cash as an independent legal person, “an entity organized by and under its DAO”, and in doing so blocked “all real, personal, and other property and interests in property” of the designated Tornado Cash entity, literally the DAO.
Two claimants initiated two cases against Department of Treasury for violation of Tornado Cash users right to First and Fifth Amendments (Coin Center v. Department of Treasury and Van Loon v. Department of Treasury).
The plaintiffs challenged the designation by arguing inter alia that the government exceeded its authority by designating a technology not a person. Tornado Cash is not controlled by any person and operates autonomously through open-source code.
The Court of Appeal also rejected OFAC’s arguments, upheld appeal by the plaintiffs and the sanctions were lifted.
Another instance of legal recognition of a decentralized organization not being registered or incorporated in traditional legal order relates to insolvency law, where the situation requires, for the sake of protection of the creditors of an on-chain organization, to indicate legal status of DAO and assign the receivership to make available fair distribution of assets among the creditors.
In Hector DAO case the US Bankruptcy Court granted recognition of receivership in respect of crypto assets of DAO, allowing Hector DAO to be treated as a debtor under US bankruptcy law – the first time a DAO has been recognized in this status.
Ooki DAO case addresses to the question of legal personality of DAO, where the US Commodity Futures Trading Commission (CFTC) filed a complaint against Ooki DAO, a decentralized autonomous organization (DAO), alleging it violated the Commodity Exchange Act (CEA).
While the court did not decide a merits issue of whether Ooki DAO as an association can ultimately be held liable under the Commodity Exchange Act, the court expressly found Ooki DAO has the capacity to be sued as an unincorporated association (Commodity Futures Trading Comm’n v. Ooki Dao 3:22-cv-05416-WHO).
Some existing bespoke laws specifically addresses to the legal recognition of DAO as an independent legal personality or as a preinstalled mechanics of internal governing infrastructure enabling legally recognizable effect of achieving certain managerial consensus by means of decentralized protocols.
So far, several states in the US have adopted the law, specifically addressing to the phenomenon of decentralized autonomous organizations: Wyoming, Vermont, Tennessee, Utah, New Hampshire.
In 2021 the COALA (the coalition of legal applications) Model DAO Law has been published, and the states were invited to adopt that law in order to support legal recognition of a new form of associations, introduced by new disruptive blockchain technology, supporting decentralized mode of governance – the decentralized autonomous organizations, which by intuition implies something decentralized and automated.
The COALA Model DAO Law sets a very ambitious goal: to make available the legal recognition or personhood of an on-chain decentralized organization, which complies with certain on-chain requirements without formal registration (or filing of articles) or any other off-chain formal procedure for such recognition. Being granted with legal personality such DAO secures for its members the limited liability, shielding them against claims of DAO creditors (either on-chain or off-chain).
The UK Government Law Commission has also issued the paper on DAO, where the Commission suggests to divide blockchain-enabled organizations into the following groups: pure DAO – with full resistance to central censorship, no off-chain property, no off-chain representatives; legally “wrapped” DAO, where DAO fully or partially formally incorporated on off-chain legal system – some functions of the DAO have fiat legal implementation; digital legal entities – where traditional legal form of a legal entity has some sort of blockchain enabled implants in its governing structure. They often called CybOrg or B-Org.
Conclusion
According to Savigny (The Second Book of Savigny’s System of Modern Roman Law) the legal personhood of an entity is first recognized based on the ability of such entity to hold and manage the property, and afterward to judicially facilitate protection of that property by the courts of the state.
The ultimate goal for convergence of on-chain and off-chain legal reality could be articulated as reciprocal synchronization to the possible extend of the positive legal system of fiat legal order (off-chain reality) and blockchain ledger (on-chain reality). Any event or occurrence having legal consequences shall be recognized by both the fiat and decentralized legal environment. Such recognition shall be mutual and shall be effective in both ways: any legal on-chain fact shall have off-chain reflection, and vice versa – an off-chain legal event shall be mirrored on blockchain ledger.
The material conflict lies in essence of decentralization – in excluding of any dominating power from the rules governing a blockchain platform. An attempt to assign the legal off-chain meaning to on-chain occurrence intervenes with essence of the fiat legal order, which inherently implies involvement of dominating ruling. A judge representing off-chain reality issues the ruling and such ruling must be recognized within the on-chain universe.
In words of Edmund Schuster, “the legal system must be the ultimate arbiter of how contractual and property rights are ultimately allocated to legal and natural persons, and that any legal systems places limits on what parties can agree to.”
It follows that recognition of the fiat legal system rulling on the blockachain undermines the essence of decentralization. The limited power of the fiat legal system represented by the state jurisdiction enevetably will create “a synchroniazation problem”, where the allocation of rights and assets on-chain will contradict to the allocation of assets and rights supported traditional legal order.
Therefore, most expected the most plausible concept for ensuring interoperability of traditional legal concept of legal personality and blockchain technology for structuring energy communities is a CybOrg or B-Org form, a digital legal entity, where the off-chain legal form will be dominating over the blockchain elements, and some functions within the legal entity are delegated to the DLT.
(Photo: Sophia Sideri)
