DAOs and the Global Shift in Decentralized Governance
By Tapan Sangal
The concept of "day-to-day control" serves as a critical regulatory benchmark distinguishing between investment and organizational structures. This principle determines whether an investment qualifies as a Collective Investment Scheme (CIS) or an investment contract by examining whether investors maintain operational control or delegate it to a separate entity.
Global Legal Foundations of Day-to-Day Control
The principle of day-to-day control is embedded in multiple legal frameworks worldwide:
1. United States - Howey Test: Established by the U.S. Supreme Court in SEC v. W.J. Howey Co., this test determines whether an arrangement constitutes an "investment contract" based on the absence of day-to-day control, with management being handled by a separate entity. 2. India - SEBI Act: Section 11AA of the Securities and Exchange Board of India mirrors the Howey Test, using investors' lack of day-to-day control as a primary condition for classifying as a Collective Investment Scheme (CIS). 3. European Union - ESMA AIFMD Guidelines: The European Securities and Markets Authority identifies day-to-day discretion as a key differentiator between collective and direct investments, emphasizing continuous decision-making beyond ordinary shareholder votes. 4. United Kingdom - FCA Handbook: The Financial Conduct Authority's test determines whether investors directly manage assets or merely participate in schemesmanaged by others.
5. Canada incorporates similar principles, reflecting a global consensus on investor control's importance in distinguishing individual investments from collective schemes.
This global alignment underscores that when investors lack day-to-day control over the management of their investments, the arrangement is more likely to be classified as a CIS or similar regulated structure, subject to heightened regulatory scrutiny. The consistency across jurisdictions highlights the universal recognition of investor control as a fundamental principle in financial regulation.
How DAOs Enable Day-to-Day Control In decentralized organizational structures like DAOs, blockchain technology and on-chain governance redefine "day-to-day control" through transparent, automated, and democratic decision-making mechanisms that enable token holders to exercise real-time control. DAO-Based Voting and Governance SystemsDAOs allow token holders to collectively manage assets through smart contracts and on-chain voting mechanisms. Key features include:
1. On-Chain Voting: Automated, tamper-proof voting system executing outcomes via smart contracts.
2. Transparency and Accountability: All transactions and decisions recorded on public, immutable ledgers.
3. Comprehensive Control Mechanisms: Token holders exercise day-to-day administrative and operational rights through:
o Voting on routine decisions o Participating in key financial decisions o Influencing business strategies o Approving or rejecting proposed changes
4. Active Participation: Token holders function as co-owners with rights to:
o Inspect financial records o Monitor asset performance o Supervise operations through voting
5. Custodian Role: While DAOs may employ custodians, their role remains limited and controlled by token holders, who can:
o Restrict custodian actions o Direct custodian decisions o Replace or modify custodian roles
6. Direct Access and Oversight: Token holders maintain:
o Physical asset survey rights o Direct operational supervision o Management report review capabilities
For DAOs operating in regulated sectors or with significant real-world assets, hybrid models combining both on-chain and off-chain components provide a flexible solution. In these structures, token holders maintain day-to-day control over digital assets while certain off-chain functions, such as legal compliance or custodial services, are handled by trusted intermediaries. These hybrid arrangements enable DAOs to meet regulatory benchmarks while preserving their decentralized ethos.
The concept of day-to-day control is globally accepted as a critical regulatory principle for distinguishing between investment structures that require heavy oversight and those that do not. DAOs, through their innovative use of blockchain technology and on-chain governance, enable token holders to exercise this control in ways that traditional investment structures do not. By providing a transparent, democratic, and automated decision-making framework, DAOs address the regulatory benchmarks for day-to-day control, enabling compliance while promoting decentralization.
In this sense, DAOs are not just compliant with global regulatory expectations—they also redefine the possibilities of what "day-to-day control" can mean in the digital era. This makes DAOs uniquely suited to navigate the complexities of modern regulatory environments, offering a forward-thinking solution for the governance of both digital and real-world assets.
The comprehensive control mechanisms implemented by DAOs ensure that token holders have a level of engagement and authority over asset management that goes beyond traditional investment structures. By empowering investors with real-time decision-making capabilities, access to detailed information, and direct oversight of operations, DAOs create an investment environment that aligns closely with regulatory requirements for active investor participation and control.
As regulatory frameworks continue to evolve, the decentralized and transparent nature of DAOs positions them as a potentially compliant and innovative approach to asset management and organizational governance. The ability of DAOs to provide investors with genuine day-to-day control over their investments may set a new standard for what constitutes active management in the eyes of regulators worldwide.
Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.
