Decentralized Autonomous Nonprofit Organizations

As near as I can tell, a decentralized autonomous organization is a pooled fund — the pooling being done by “token” holders — that doesn’t need the business judgement rule or any of the fiduciary duties in the Revised Uniform Partnership Act, the Restatement 3rd Agency, and the Model Business Corporation Act.  Conceptually, charitable DAOs do what they do – fundraising, dispensing grants, educating, researching, even providing health care, I imagine — through “smart contracts” and without human agents.  Human employees, partners, and directors are plagued with stupidity, disloyalty, and malice of the sort fiduciary obligations police.  Computers don’t suffer from any of that.  The whole idea of AI is the fantasy that we can eliminate human error by eliminating human passion.  And compassion, I bet.   If AI were human it would be Spock on brain steroids. And everybody knows Spock wasn’t human.  

And when people develop DAOs for charity, we should also have no further need for the prohibition against private inurement.  AI doesn’t consume so what does it care about skimming profits?  Its not stupid either so we don’t have to worry about campaign intervention.  Politics would be a total waste of time for DAOs.

There is an interesting article in Bloomberg yesterday discussing a hidden issue as it regards tax exempt DAOs.  A DAO without profit motive might not be an entity at all.  And if cannot be an entity, it cannot get tax exemption.  I think that’s what the author is asserting.  In that case, presumably, the earnings to the DAO would be taxable to the token holders as mere co-owners of property.   My lack of IT knowledge is probably making this harder than it needs to be.  Here is an excerpt:

Exemption Options

Charitable DAOs that wish to both (a) conduct tax-exempt economic activities and (b) qualify donations for tax deduction must carry on their activities under the auspices of an entity that has been granted tax-exempt status by the IRS. The I.R.C. is designed to include accountability by requiring that tax deductible charitable contributions may only be donated to US government units; §501(c)(3) tax-exempt organizations; posts or organizations of US war veterans; domestic fraternal societies, orders, or associations operating under the lodge system; and cemeteries. Apart from the cemeteries, it is nearly always required that the charitable gift be used exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals. Further, organizations granted tax-exempt status must put forward a living, breathing human being with a hand to shake (or throat to choke) to answer on behalf of the organization’s charitable activities .

So, what is the workaround for nimble DAOs wanting to conduct philanthropy and avoid the heavy-handed tax-exemption requirements? The short answer is that under current laws, there isn’t one, but note that a DAO with very low annual gross receipts (under $5,000) could qualify as a nonprofit under the §501(c)(3) gross receipts test. And for the true-blooded crypto anarchist who sees the requirements of centralized human-based organization as an affront to their ideology, there are many alternatives that could enable a charitable DAO to conduct philanthropic activities with lighter burdens than full tax exemption. 

darryll k. jones