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Key Blockchain Compliance Challenges: The Legal and Regulatory Issues


Leo Henkels

Leo Henkels

Managing a blockchain structure is simple technologically, but can be incredibly challenging from a legal and compliance standpoint. Meeting local laws to protect users and investors is a difficult undertaking with such a newtechnology. Modern laws still haven't caught to all the features of most blockchains, which is why it's essential to consider what it takes to meet blockchain and regulatory compliance goals. 

What is blockchain compliance?

Blockchain compliance means creating a blockchain structure that can follow local laws that impact the structure. A compliant blockchain structure should also be designed so it will remain legal and simple to manage as local government laws change as well. This is incredibly difficult to get right, especially since laws are still evolving. Below we examine the biggest compliance challenges and potential solutions to some of them. 

Blockchain Compliance Challenges

Meeting Jurisdiction Laws Can Be Challenging

Law enforcement agencies in the United States, and in most other areas of the world all operate on the idea of jurisdiction. Blockchain technology by definition is not limited to a particular jurisdiction. Therefore, country governments are struggling to regulate and manage this technology, and relegate to enforcing inadequate local laws When establishing a new currency or organization that uses blockchain technology, it's now essential to consider local government laws and whether they will impact the organization when forming operating policies and procedures.

blockchain structure

Neutral Technology Regulation Leads to Unpredictable Enforcement

Regulators look at blockchain technologies in a neutral way. They try to see what a blockchain is doing, rather than what technology it's using. This means, to be safe from legal issues a blockchain organization must carefully establish its operating practices and its purpose so regulators can understand. 

Liability Must Be Carefully Established

Blockchain technology is often vague, especially about who is in charge. To protect the users of a specific blockchain organization it's essential to determine how liability works within the organizational structure. This can be a struggle for DAOs, as they’re decentralized at their core. 

Careful Legal Documentation and Governance Practices are Essential

A blockchain platform seems like it's above the law, or outside of the law because of its design. However, the world governments don't feel that way. If something illegal occurs involving technology from a specific blockchain group, someone is going to be held responsible for that. This is why it's essential to establish a chain of command and to create legally-binding contracts between the administrators of the blockchain and the users. This is a vital step in the blockchain compliance process. 

Smart Contracts are Sometimes Legally Binding

Smart contracts are bits of code that control how blockchain networks operate. These special contracts are sometimes legally binding and sometimes not. It's essential to understand whether your smart contracts are legally binding based on the jurisdictions 

DAOs or Decentralized Autonomous Organizations

A DAO is an organization that is managed by all its users. Such a setup makes enforcing laws more difficult. When establishing a DAO it's essential to decide what legal structure it will have and which jurisdiction it should answer to. Answer these questions early and hard-code them into the rules for the DAO to eliminate the uncertainty. We recommend using MIDAO’s DAO LLC structure to all DAOs.

Intellectual Property or IP

A successful blockchain must share nearly all the technology it is built on with its users. Because of this, it's vital to consider what intellectual property is involved, who owns the technology, and whether licensing agreements are in place or not. When establishing a blockchain organization you must think about how intellectual property issues will be handled, structure an agreement for intellectual property use and clearly define how licensing will work. 

Privacy and Data Protection

Blockchains, by design, store data in a log that cannot be changed. This makes data protection challenging if people are providing personal data they don't want everyone to be able to access. Blockchain organization’s creators must think about data-sharing rules and how private data will be managed to avoid sharing the data with every user on the chain.

blockchain technology

How to Succeed with Blockchain Regulatory Compliance

Accurately Define Your Blockchain Organization’s Use-Case

Start your journey toward successful blockchain standards for compliance and trust by identifying how your blockchain organization will be used. Explore the purpose for the group and the technology and document that purpose as accurately as you can. Knowing the purpose helps you create smart contracts, choose a legal structure and identify the different roles people will have in the blockchain structure. 

Determine Your Legal Structure

Once you know how you'll use your blockchain organization it's time to establish a legal structure. Work with an attorney in MIDAO’s partner network or consult with MIDAO to help you form your network into a DAO LLC, the best legal entity for blockchain organizations.. This makes it easier for lawmakers to apply laws to your network. 

Identify Blockchain Actors and Their Legal Obligations 

Once you know the legal structure you're using, define specific roles or blockchain actors within your network. Everyone from the network operator at the top, down to the different types of nodes and partners should be defined. Building the right organization structureand meeting compliance issues is essential to running a successful network. When you label the different actors in the network, and you apply those labels to your users, you have a hierarchy that jurisdictions and government agencies look at when dealing with issues with your network. 

By completing these essential tasks you're forming your blockchain organization to be legal and compliant with local government agencies. Of course, there are going to be issues that arise that you didn't consider during the initial structuring process. When these issues arise you can make changes and adapt. Having a good base of compliance and legal considerations will help you avoid most legal issues that result from poorly planned blockchain structures. 

Conclusion: Focus on Compliance from The Beginning

Building a blockchain structure seems simple at first until you consider all the potential regulatory and legal hurdles you must overcome. Meeting compliance goals with your blockchain structure is far more challenging and requires you to consider concerns with jurisdiction, intellectual property, data protection, DAOs, and more. If you spend time focusing on all these concerns you'll build a more stable blockchain structure that's less likely to be penalized or fail legally.