Legal Risks for DAOs: Navigating Compliance, Regulation, and Jurisdiction

The Uncharted Legal Territory

DAOs are a radical new form of organization, but they exist in a world that is still governed by old laws. This has created a situation of profound legal uncertainty. Are DAOs legal? Who is liable if something goes wrong? These are the urgent questions that every DAO participant must grapple with.

Decentralized Autonomous Organizations (DAOs) represent a paradigm shift in how blockchain enthusiasts coordinate, pool capital, and govern protocols. Thanks to DAOs, they can now coordinate capital and labour through smart contracts rather than corporate boards, while decisions are made via token-weighted voting. However, this model rarely fits into any existing legal boxes. This is mainly due to a problem of definition.

DAOs cannot be classified as corporations, cooperatives, or charities. As a result, the landscape involves high risk and uncertainty for anyone involved, be it a developer or token holders. Also, the assumption that decentralization and pseudonymity protect DAOs from liability has increasingly been proven false.

This article provides a high-level overview of the key legal risks facing DAOs in 2025 in the U.S. We will explore the frightening default classification of DAOs, the challenges of regulatory compliance regarding securities and anti-money laundering laws, the current debate over the legal status of DAOs, and the complex issue of jurisdiction in a borderless digital world.

The Core Problem: Are DAOs Unincorporated General Partnerships?

The single most significant risk facing an unregistered DAO in the United States is the default classification. Legal systems globally despise a vacuum. If a group of people comes together to pool resources and work towards a common goal (especially a profit-seeking one) without filing specific paperwork to become a corporation or an LLC, the law does not view them as a non-entity. Instead, in the absence of a specific legal structure, a DAO is likely to be treated by law as an “unincorporated” general partnership, as decided by a Federal Court in California last year.

On the surface, this seems inconsequential. However, in the legal world, this has significant implications. The defining characteristic of a general partnership is that it does not offer a liability shield. In a corporation, if the business goes bankrupt or faces a lawsuit, the shareholders only lose the value of their shares; their personal assets are not affected.

On the other hand, in a general partnership, the liabilities of partners are unlimited. Also, they are jointly and severally liable for the debts and obligations of the partnership.

By implication, any member of a DAO can be held personally liable for the actions of the entire organization. For instance, where a DAO’s code is exploited, resulting in loss of funds, or where they are being sued for copyright infringement, a claimant could theoretically sue a single token holder for the full amount of damages.

Courts have made it clear that if a DAO is treated as a general partnership, token holders may be personally liable, meaning the only way to seek compensation is by suing fellow token holders or adding them to the same lawsuit. The Ooki DAO case is a defining example of this reality.

CTFC official statement on the Ooki DAO litigation victory. Source: CFTC

When the bZeroX protocol dissolved its traditional LLC structure and rebranded as the Ooki DAO to “decentralize” and avoid regulatory scrutiny, the CFTC argued that token holders who voted on governance proposals were effectively managing the enterprise. The court agreed, ruling that mere participation, including holding a token in a crypto wallet and voting, constituted operational control, dismantling the assumption that decentralization offers regulatory immunity.

The Search for a Solution: Legal Wrappers for DAOs

With the growing threat of unlimited personal liability, many DAOs now have little choice but to adopt some form of legal structure. This has led to the rise of “legal wrappers,” traditional entities such as LLCs, foundations, or associations that serve as the legal interface between the DAO and the real world. These wrappers shield individual members from being personally sued while giving regulators and counterparties a clear entity to interact with.

However, this solution comes with a trade-off. While legal wrappers offer much-needed protection and operational clarity, they also introduce a new degree of centralization. For many, this feels like a retreat from the fully decentralized ideals that DAOs were built on. Still, as the legal environment tightens and crypto market news continues to highlight rising enforcement actions, more DAOs are embracing wrappers as the practical compromise between protection and decentralization.

Below are the most commonly adopted legal wrapper models:

• The Cayman Foundation

This is often the preferred choice for most DeFi and Layer-1/2 ecosystems. This is because it offers neutrality, tax efficiency, and strong legal protection while keeping the foundation mission-aligned with the DAO’s public-good nature.

It is also the best structure for DAOs with global contributors who want to avoid U.S jurisdiction and maintain a more decentralized, offshore legal posture. In this model, the DAO functions as the beneficial owner while the foundation executes off-chain agreements.

• The Swiss Association

This structure is best suited for community-focused or non-profit DAOs, mirroring structures used by the Ethereum Foundation and Web3 Foundation. It supports missions oriented around public goods and long-term ecosystem development.

• The Wyoming DAO LLC

The State of Wyoming created a specific legal framework that allows DAOs to register as Limited Liability Companies. It’s simple and relatively cheap to set up, though it requires a Wyoming-resident agent. This model is ideal for DAOs seeking U.S. recognition, bank accounts, or contractual capacity.

The only downside, however, is that the entity will be subject to U.S regulatory risk and governance tokens may be treated as securities. Also, this structure does not guarantee anonymity.

• Panama Foundation

This structure is best suited for DAOs seeking maximum flexibility and strong privacy protections, particularly when team members want to limit their personal exposure. Panama foundations have no shareholders and are well-suited for DAOs that want to minimize U.S. or EU regulatory exposure

Overall, it works well with treasury management, protocol ownership, and administrative functions that require a legal entity without hierarchy.

• The UNA (Unincorporated Non-profit Association)

In some jurisdictions, DAOs can remain unincorporated while receiving liability protections similar to an LLC. This lets the DAO maintain a decentralized structure without formal registration, though applicability varies widely.

Despite their advantages, such as signing contracts, holding intellectual property, and acting as a recognized legal entity, wrappers are not a perfect solution. They introduce centralization, require named directors or trustees whose names appear on paperwork, and subject these individuals to regulatory compliance.

In effect, DAOs must retrofit innovative governance models into traditional corporate structures similar to crypto exchanges, which raises a difficult question: Is a DAO still a DAO if it becomes legally indistinguishable from a standard LLC?

The Regulatory Minefield

Even if a DAO resolves the questions of liability using a wrapper, it still needs to navigate the content of the laws governing the structure adopted. Currently, two specific areas of law pose the greatest threat to DAO operations: Securities Regulation and Anti-Money Laundering (AML) compliance.

• Securities Law

The U.S authorities often apply the Howey Test to determine if an asset is an investment contract or security. The test essentially asks if there is an investment in a common enterprise with a reasonable expectation of profits from the efforts of others. As a result, most crypto entities fall under the supervisory control of the Securities and Exchange Commission (SEC).

Meanwhile, if a DAO’s token is classified as a security, the implications are grave:

1. The DAO becomes an unregistered securities exchange
2. The issuance of tokens to contributors or via airdrops would be considered an unregistered securities offering.
3. The DAO will also be subject to reporting and disclosure rules, as well as restrictions on who can buy the token.

The core tension lies in the “efforts of others” prong of the Howey test. If a DAO is truly decentralized without a wrapper covering, there would usually be no security test, but the DAO risks being classified as a general partnership.

• Anti-money Laundering (AML) Law

Similarly, having a face to a DAO suggests mandatory compliance to Anti-money laundering (AML) rules. Global bodies like the Financial Action Task Force (FATF) have updated guidance to suggest that if a DAO (or a wrapper) has control over a protocol, it may be a Virtual Asset Service Provider (VASP). Meanwhile, VASPs are required to perform Know Your Customer (KYC) checks on their users.

The challenge, however, is how a DAO can perform KYC on a user interacting directly with a smart contract via a non-custodial digital wallet. The very nature of a DAO and DeFi is unrestricted access. As a result, introducing KYC would break the composability of DeFi and exclude millions of unbanked users.

The Jurisdiction Puzzle

Another layer to DAO’s legal troubles is the issue of jurisdiction. A DAO is a global online organization with no physical headquarters, CEO, or central server room. Often, members are distributed across states, enjoy anonymity, and only coordinate activities via on-chain voting, creating a puzzle for regulators and courts alike on the applicable law to issues concerning a DAO.

This raises fundamental questions: Where should a DAO pay taxes? In which country can it be sued? Which laws apply when its participants span continents? Increasingly, regulators are asserting that if a DAO has users or members within their borders, they have the authority to regulate it.

In response, many DAOs are turning to forum shopping, favoring jurisdictions like Bermuda or Malta that offer more accommodating regulatory frameworks. Others rely on geofencing to block users in high-risk regions, though this approach remains suboptimal as participants often bypass restrictions through VPNs. The result is a jurisdictional maze where both regulators and DAOs struggle to assert control without undermining the core promise of decentralization.

Conclusion: The End of the Wild West

Managing a DAO is like walking a tightrope between innovation and regulation. On the one hand, the legal systems frown at the lack of structure that prevents accountability and undermines compliance. On the other hand, creating a structure defeats the very purpose of DeFi technologies and DAOs. Having a team in control simply converts it to a centralized system that potentially qualifies the tokens as securities, exposing them to mandatory legal standards such as the AML rules.

Consequently, the decentralized crypto ecosystem remains a regulatory gray area, with DAOs striving to maintain their principles while regulators continue to assert oversight. Many are seeking refuge in crypto-friendly jurisdictions such as Bermuda, but the tension between innovation and compliance persists.

Ultimately, the legal landscape for DAOs is complex and rapidly evolving. If you are a DAO founder or a core contributor, it is essential to seek expert legal advice to stay compliant. For everyday users who want to participate in DAO ecosystems, platforms like Digitap provide a secure and regulated way to buy, hold, and manage DAO-related tokens without navigating risky or unregulated exchanges.

Frequently Asked Questions (FAQs)

Are DAOs legal?

Yes, DAOs can be legal, but their status depends on the jurisdiction. In some regions, they are treated as unincorporated general partnerships. In progressive areas like Wyoming (USA), DAOs can register as legal entities and gain corporate recognition.

Can I be sued for being a member of a DAO?

Yes, if the DAO is an unincorporated general partnership, members can be personally liable. In such cases, you may need to sue other members or include them in the lawsuit, as seen in the Ooki DAO and Lido DAO cases. However, if the DAO is structured as an LLC or operates in a jurisdiction with protective rules, members are generally shielded from personal liability.

What is a legal wrapper for a DAO?

A legal wrapper is a traditional legal entity that acts as an interface between a DAO and the real-world legal system. It can sign contracts, pay taxes, and handle legal matters on behalf of the DAO. Common examples include a Cayman Foundation, Swiss Association, and Wyoming DAO LLC.

Are governance tokens securities?

Yes, they can be considered securities under the Howey Test, which defines a security as an investment with an expectation of profit derived from the efforts of others. Even in a decentralized DAO, regulators may view the core developers holding key control as de facto managers, making the tokens subject to securities laws.

How can a DAO comply with regulations?

DAOs can comply by combining legal and technical measures. Adopting a legal wrapper helps limit personal liability for members. They should also follow AML rules by implementing KYC checks at the protocol level. Additionally, some DAOs geofence their platforms to restrict access from strict jurisdictions, reducing the risk of triggering local securities laws.