DAOs vs. Nation States: A Wyoming DAO’s Experiment with the U.S. Securities and Exchange Commission

Abstract

Decentralized Autonomous Organizations (DAOs) have potential to decentralize many essential functions of nation states by establishing a decentralized political, economic, and social order via various consensus mechanisms on a large scale. The fundamental question is whether DAOs can emerge from and be compatible with the existing laws and regulations of nation states under which only traditional centralized organizations are allowed. American CryptoFed DAO LLC (CryptoFed) was established under the Wyoming DAO law. Its mission aims to decentralize the central bank’s money supply function which is monopolized by and is fundamental to all nation states. Therefore, CryptoFed is an ideal case to study the relationship between DAOs and nation states. DAOs cannot function without token issuance and circulation. To this extent, the U.S. Securities and Exchange Commission (SEC or Commission) may prevent DAOs from issuing tokens and subsequently suppress DAOs’ emergence and growth from inception. Therefore, the SEC is an ideal Federal governmental agency representing the nation state apparatus of the U.S. for this case study. Through analyzing the administrative proceedings which the SEC has instituted against CryptoFed’s Form 10 and Form S-1 filings, this paper illustrates, i) what litigation strategy the SEC has deployed to stop CryptoFed’s token registrations, ii) how the SEC’s power and jurisdiction have been constrained by both the merit neutral spirit of the securities laws and the strong due process protections provided by the Fifth Amendment of the U.S. Constitution, the Administrative Procedure Act, the SEC’s Rules of Practice (17 CFR 201.100, et seq) and legal binding precedents, and iii) why it is possible for DAOs to coexist with the United States as a nation state under the existing U.S. laws and regulations.

Keywords: DAO, SEC, Howey Test, Central Bank, Due Process

JEL Classification: K22