The term ‘Decentralized Autonomous Organization’ or ‘DAO’ refers to a group that is organized around a common purpose via blockchain powered voting and decision-making. The DAO governance operates through DAO tokens that entitle the tokenholder to vote on DAO matters in accordance with the DAO framework.
Hector DAO was created in 2021 for the purpose of managing crypto-asset investments through blockchain based operations. During 2023, Hector DAO suffered considerable financial losses to its treasury assets due to volatility of the crypto markets, in response to which the DAO tokenholders voted to approve the voluntary liquidation and distribution of Hector DAO’s treasury assets. During the liquidation process, in January 2024, Hector lost a further $2.7 million worth of distributable DAO treasury assets after it suffered a hack, prompting the DAO liquidation committee to seek judicial protection for the treasury assets and apply to the courts in the British Virgin Islands to appoint receivers.
The BVI court responded swiftly and pragmatically, and on 9 April 2024, issued a final receivership order appointing the Receivers on a full and final basis. Under the terms of the order, the Receivers were granted extensive powers over the treasury assets and the operations of Hector DAO, including the authority to take and retain possession and control of the wallet holding the assets, investigate antecedent transactions affecting Hector DAO, and enter into transactions on behalf of Hector DAO.
The conceptual difficulty that the BVI court had to overcome is that a DAO is not universally recognised as having a particular legal form or status. Different jurisdictions may treat DAOs in very different ways. It is therefore very often not clear what the legal position is of the DAO and the DAO tokenholders. The decision of the BVI court to grant the receivership, therefore, sets an important and helpful precedent by acknowledging that DAOs, despite their decentralized and autonomous structures, could be treated as debtors in an insolvency or asset administration context. A US bankruptcy court subsequently followed suit and recognised that Hector DAO could be the subject of an order under Chapter 15 of the US Bankruptcy Code, even though a DAO lacks a formal legal entity status, such as incorporation, that is required under the US Bankruptcy Code to be recognized as a debtor eligible for bankruptcy protection.
The decisions by the BVI court and the US bankruptcy court in the Hector DAO matter underscores the judiciary’s role in purposefully interpreting business and commercial laws in the context of novel technologies that permit businesses to be organised differently from traditional corporate structures. The BVI court did not shy away from this responsibility, which confirms the reliability and adaptability of the BVI as a jurisdiction for novel business structures and formations.