Do DAOs exist in Switzerland?

Building on the architecture of smart contracts, Decentralized Autonomous Organizations (DAOs) are starting to emerge from the blockchain environment. These new forms of organized entities are similar to companies and they allow participants to manage resources in a decentralized manner thanks to predefined governance rules inscribed on a series of smart contracts deployed on a blockchain.

Before a DAO can undertake an economic activity in Switzerland, it is necessary to determine whether this type of entity can have legal effects in Switzerland. The answer to this question depends on the recognition of the DAO in the Swiss legal order in order to grant it legal existence. While the recognition of a foreign DAO governed by the law of a State does not raise particular legal issues, DAOs that only exist on the Internet and that haven’t been constituted according to the law of a State upset existing legal principles, which generates legal uncertainty as to their existence.

Few legal scholars have studied the recognition in the Swiss legal order of DAOs existing only on the Internet. However, the common practice is to try and apply existing legal concepts known in Swiss law to those entities. This operation is complex as Swiss law has currently no rule specifically governing DAOs. Some authors recommend subjecting them to the company law regime by trying to fit them into one of the forms of company existing in Swiss substantive law, such as the company limited by shares (SA) or investment companies (SICAF and SICAV). According to other authors, there is no other choice but to qualify DAOs existing only on the Internet as simple partnerships as they do not meet the formal or material requirements of other forms of companies. This amounts to considering that DAOs are only a set of contractual relationships. In our opinion, rather than attempting to apply the rules of Swiss company law to DAOs, it is preferable to consider DAOs as foreign companies and to recognize them as such using the tools provided by private international law. The advantage of this preferred pathway is to allow DAOs to exist in their current construct, while recognizing their legal effects in the Swiss legal order.

However, a strict interpretation of the Private International Act (PILA) leads to a dead end for DAOs that exist only on the Internet as, by law, a foreign company must be validly constituted under the law of the State it is governed by in order to exist in Switzerland (Art. 150 and 154 PILA). The theory of functional equivalence, which recommends considering a substantive or formal requirement intended to guarantee legal protection as being met when a computer system makes it possible to replace this requirement in an equivalent manner, provides a possible solution. Based on this theory, the solution we suggest is to recognize the existence of an online jurisdiction governed by its own code. This new legal construction makes it possible to consider the code of a DAO as being its governing law and the digital space as the State from which this law originates. We thus offer a means of granting legal existence to DAOs that were not created according to the law of a State. As such, this type of DAO can be recognized in Switzerland as a foreign company with rights and obligations.

The full developments of this new legal construct can be found in the following paper: Riva Sven, Decentralized Autonomous Organizations (DAOs) in the Swiss Legal Order, Yearbook of Private International Law, Volume 21 (2019/2020), p. 601-638.