2

In this section, the concepts of ‘smart contracts’ and ‘DAOs’ as decentralised applications of blockchain technology [2] are described in some detail. The authors presume that readers possess minimum knowledge as to the underlying technology itself.

8

In the economic analysis of the concept, the authors propose a basic architecture for the blockchain-based vending machine, including pricing and fee mechanisms. They also examine potential challenges arising out of the setup. The main purpose behind the physical autonomous marketplace envisaged by the authors is to address counterparty risk associated with virtual assets related to a physical object. A traditional and intermediated way to address such counterparty risk for promises of physical goods is through escrow or custody services. Imitating escrow in function, the authors posit a new type of vending machine that connects the purchase and the delivery of goods atomically via delivery-versus-payment, or DvP. [13] The processes relating to the DvP function are embedded in and executed by smart contract codes in a deterministic fashion. Residing on a public [14] blockchain, these contracts form a DAO that controls the vending machine. [15]

9

The basic setup in the economic analysis is described as follows: [16]

The peer-to-peer vending machine consists of two main elements. First, the machine, i.e., the actual physical vending machine including the required software to connect to the Blockchain and translate the signals received into corresponding actions. Secondly, the DAO in the form of a dedicated smart contract structure on a public Blockchain. The former provides a physical incarnation, while the latter governs the behavior of the machine and controls the logic and conditions of the interactions. It is fully transparent, protected from unforeseen intervention, and open to anyone.

Let us assume that the machine consists of a number of slots. Each slot shows a unique identifier and has a goods compartment with a transparent door that can be locked individually. It also has a display, to assist users in their interactions. The vending machine is located in a public space. It is easily accessible, meaning that anyone can interact with the vending machine by assuming the role of a buyer or seller.

Buying works in the traditional way. When someone sees a good in the vending machine for which they have a buy interest at the given price, they can buy it instantly. The main difference to a regular vending machine is that instead of buying from a central counterparty, i.e., the vending machine operator, the buyer engages in a peer-to-peer transaction with someone who placed the object in the machine.

Analogously, selling via the vending machine is open to anyone, provided there is a currently unused slot. A seller simply places the goods in the compartment and provides the sales parameters, such as pricing. The machine will then initiate the sale and take over custody by locking the door. Thereafter, no further action is required of the seller, the proceeds are automatically distributed after a successful sale.

Both the buying and the selling process are governed by the DAO’s smart contracts. To release goods or lock a compartment, the machine relies on events emitted by the DAO. Also, it is the source for the currently valid parameters on pricing and fees, which are detailed later on.

To increase the autonomy of the DAO, i.e., reducing the dependency on humans the smart contract structure may be designed to cover a multitude of aspects. For the basic setup, however, we propose a lean structure that focuses on the autonomous handling of the core processes of buying and selling goods through the machine, plus a governance mechanism to propose and vote on fee parameter changes or extraordinary events.

While it is possible to interact with the machine directly via smart contract function calls, a simple user interface is proposed to lower the barriers to entry for potential users with limited Blockchain and smart contract knowledge. To provide a basic user experience, the machine has a display to guide through the buying and selling process as well as a button next to each slot to unambiguously indicate which slot the interaction is targeting.

10

The authors of the economic analysis draw the conclusion that the deployment of a blockchain-based vending machine could contribute to the understanding of DAOs whilst building a bridge between digital and physical markets. The authors’ proposal is deliberately limited to technical and microeconomic aspects. For a full assessment of the initiative’s feasibility, a legal perspective must be added. This is because mainstream economic processes, other than the shadow economy, [17] take place in and are defined by a legal system. The argument for a legal vacuum [18] in which DAOs and blockchain networks exist, as promulgated by some proponents does not withstand further scrutiny. [19] But, as the past has shown, our continental European legal system has been caught off-guard by some of blockchain technology’s inventions, and the process of understanding how the said technology could be made sense of and dealt with by our legal system is still underway. [20] In the analysis below, Swiss substantive law is considered from a de lege lata perspective to assess the feasibility of the proposed concept.

14

To assess whether the proposed concept can be adequately utilised given the applicable substantive Swiss law in the areas of contract, tort, tax and criminal law, we formulate a hypothetical scenario in the form of a typical transaction that could occur when making use of the blockchain-based peer-to-peer vending machine.

15

For this scenario, let us assume a DAO maintains an instantiation of the proposed vending machine, which is situated in a common use public area in the city of Zurich, Switzerland. The DAO, hereinafter referred to as ‘BVM DAO’, is managed by and consists of natural persons who do not know the full identity of each other, but have been coordinating and communicating on an online forum using pseudonyms in order to commission the building of the vending machine, the writing of the smart contract codes and the raising of the corresponding funds for the BVM DAO.

16

For the construction of the physical component of the concept, the BVM DAO has commissioned a construction worker in Zurich who has accepted an upfront payment in the cryptocurrency ether [21] and full payment after successful completion. The smart contract code running the vending machine is written by one of the BVM DAO members, known only by his pseudonym ‘BVM Enthusiast’, who normally resides—unbeknownst to the other BVM DAO members—in Albania. The BVM DAO maintains the vending machine as a marketplace for physical goods.

17

In order to become a member, a membership fee has to be sent in ether to the BVM DAO wallet. New members must be accepted via a majority vote by the existing BVM DAO members. From the membership fee, the maintenance of the BVM DAO is financed, and an insurance fund is maintained for lawsuits or fines against the BVM DAO or its members for acts committed in the capacity of the BVM DAO. Distributions from the insurance fund are subject to a funding proposal by the liable party and an acceptance by majority voting. Transaction fees earned by the BVM DAO from vendors are evenly distributed among BVM DAO members on a recurring basis. All other functions follow the proposal as described in Section A.II.

18

Slots in the vending machine maintained by the BVM DAO are rented out to vendors. A recurring text on the display of the vending machine reads as follows: by purchasing any goods the buyer accepts the BVM DAO’s terms of services which can be found under bvmdaozurich.ch/terms . As part of these terms, BVM DAO stipulates that vendors of goods in the BVM DAO are vetted for their reputation and the quality of goods sold. Furthermore, an exoneration of liability clause reads as follows: liability of the BVM DAO for any damage incurred out of the use of the BVM DAO is, as permitted by applicable law, excluded. Lastly, under the terms of service it is also reiterated that the use of the BVM DAO and these terms are governed by Swiss law, whereby the courts in London, United Kingdom, shall be exclusively competent to adjudicate any and all disputes arising out of or in connection with the use of the BVM DAO.

19

Vendor X imports and sells luxury goods in one of the slots in the BVM DAO. One such good is a Rolex Daytona.

20

Buyer Y buys a Rolex Daytona from Vendor X. He picks up the released Rolex from the vending machine after the purchase price in ether has been delivered to the smart contract and transferred to Vendor X atomically. Two weeks after the completion of the purchase, Buyer Y starts questioning whether the Rolex Daytona is an original one and whether it has been tested by a horologist. The purchased product turns out to be a counterfeit object. The certificate of authenticity, accompanied with the product, seems to have also been forged. Frustrated with this, Buyer Y seeks action and reimbursement of the purchase price he paid for the fake product. However, Vendor X, the real identity of whom is neither known to Buyer Y nor to BVM DAO, does not react to any contact attempts.

21

In order to assess the suitability of Swiss private law in handling transactions and interactions with the vending machine, the legal relations between involved parties would need to be described. The private law relations between the BVM DAO and Vendor X as well as the Buyer Y shall be taken into account as follows.

22

It is argued herein that Buyer Y and Vendor X are in a contractual relationship with one another as parties to a purchase contract. The mere fact that the purchase price was paid for in ether does not render it a barter contract, as ether is considered a private currency and therefore comparable to fiat currency as a public money, exclusively as to its ‘means of payment’ function. [23]

23

It is furthermore argued that a contractual relationship exists between Buyer Y and the BVM DAO or members of the BVM DAO collectively, given that Buyer Y’s implied acceptance of BVM DAO’s contractual terms is affirmed by using the vending machine.

24

The BVM DAO is in a contractual relationship with Vendor X, who rents a slot in the vending machine to sell goods. The contract is most accurately described as a lease contract.

25

For the purposes of this hypothetical scenario, the BVM DAO, in the absence of any legal personality, can most accurately be described as a partnership according to article 530 para. 1 of Swiss Code of Obligations (CO), whereby “a partnership is a contractual relationship in which two or more persons agree to combine their efforts or resources in order to achieve a common goal”. [24]

26

On the discussion of whether and how smart contracts, in general, can be reconciled with Swiss contract law, in-depth analyses are offered by other, existing publications. [25]

27

Buyer Y entered into a purchase contract with Vendor X. As the purchased good, the Rolex Daytona, turned out to be fake, Buyer Y wants to receive back the purchase price or receive an original product, either from Vendor X or from the BVM DAO.

28

According to article 28 CO, “a party induced to enter into a contract by the fraud of the other party is not bound by it even if his error is fundamental”. In order for article 28 CO to apply, a fraudulent behaviour would need to embed certain constituents. These include (i) fraudulent intent, (ii) illegality, (iii) a mistake in motive and (iv) causality between the fraud and the conclusion of the contract. [26] The party acting under fraud is therefore not bound by the contract. By declaring the absence of intent to the counterparty, the contract is nullified ex tunc, and the defrauded party may seek restitution for the damage incurred based on articles 62 et seq. CO. [27]

29

Buyer Y entered into the purchase contract with Vendor X based on the assumption that the Rolex Daytona was original, as portrayed in the title of the offer and the corresponding certificate of authenticity. Vendor X acted fraudulently with intent, and no legal justification was offered for such behaviour. Therefore, article 28 CO would apply here awarding Buyer Y to declare the contract void and to seek restitution for the purchase price as well as any additional damage caused by the fraudulent behaviour of Vendor X. Buyer Y must then declare the nullification within one year of learning about the fraud. [28]

30

In general, Swiss contract law has no fundamental difficulties in dealing with the fact that a contract was facilitated using a smart contract, [29] even more so when a smart contract was used to hold and release the purchase price for a physical object as a one-time transaction. Given the state of the nullified contract, Buyer Y may seek restitution based on unjust enrichment on the basis of articles 62 et seq. CO. He has a right to reimbursement of the purchase price plus additional damages by Vendor X in ether or in Swiss francs, alternatively. [30]

31

Difficulties instead arise from the fact that BVM DAO allows mutually unidentified persons to enter into transactions, exchanging monetary values for goods. While the DvP part of such a transaction can be aptly handled by the DAO, the post-transaction and settlement lifecycle of a contract cannot. Thus, if Buyer Y reasonably wants to enforce any right arising out of the consumed purchase contract, the identity of Vendor X must be accessible to him.

32

As Vendor X is out of reach, Buyer Y may try to seek restitution from BVM DAO as the marketplace provider through which the transaction was enabled in the first place.

33

As detailed previously, BVM DAO claimed to vet Vendors. The question would then arise whether BVM DAO is liable for the damages Buyer Y incurred by trusting the information by Vendor X in light of BVM DAO’s claim to vet vendors for the quality of products.

34

As a contractual relationship between Buyer Y and the simple partnership BVM DAO is now affirmed, Buyer Y is in a position to seek restitution from BVM DAO based on contractual damages, [31] specifically for the violation of contractual obligations such as the violated duty to vet Vendors. [32]

35

Buyer Y, therefore, brings claims against the simple partnership BVM DAO via the email listed on their website. As a simple partnership, every member is jointly and severally liable for the totality of the damage incurred to Buyer Y under the contract. [33] While the law once again is unambiguous here, Buyer Y does not actually have any identifying information on any BVM DAO member. As a result of long internet searches, Buyer Y learns about the true identity, name and address of the BVM Enthusiast pseudonym who resides in Albania. Buyer Y initiates a lawsuit against BVM Enthusiast as a severally liable member of BVM DAO in Zurich. Upon learning of the lawsuit, BVM Enthusiast files for legal funding from BVM DAO’s member insurance fund, which is granted by a majority voting. Upon processing the lawsuit, the court called upon in Zurich makes a decision to dismiss the lawsuit without entering into the substance of the case, as the choice of forum in the terms of service on BVM DAO’s website was deemed valid, and the case was not characterised as a consumer dispute, which would have established forum in Zurich according to article 32 of Swiss Civil Procedure Code (CPC), given that the product in question is a luxury good. [34] Buyer Y, frustrated with this outcome, leaves the matter be.

48

The scope of the present legal analysis clearly excludes the token [40] ecosystem [41] and economic aspects related to the proposed concept. [42] Nevertheless, given the recent regulatory and legislative reforms in Switzerland, the authors take the view that these will have implications over the intended token design, in particular when due account is given to its substance over its form.

49

Switzerland has recently reformed existing laws in order to accommodate blockchain systems and to address Decentralised Finance (DeFi) applications. The Federal Act on the Adaptation of Federal Law to Developments in DLT, has been adopted having received parliamentary approval, with partial implementations throughout this year. [43] This Act introduces a number of changes permitting the development of decentralised governance in systems that are aimed at financial transactions. [44] In other words, the reform is set to permit the exchange of asset tokens, among others, as uncertificated securities. This specific category of tokenised rights, [45] defined as uncertificated register securities, [46] and the legal transfer thereof, concerns any right that can effectively be securitised.

50

Under Swiss law, [47] securities in general are certificated or uncertificated securities, derivatives or intermediated securities, which are standardised and suitable for mass trading. [48] Outside of this traditional definition, questions would arise as to whether standardised elements such as voting rights could also qualify as securities. It is apparent that definition of a given digital asset in the form of a token as a security would fall outside both certificated and intermediated securities categories, whereby only uncertificated securities and derivatives would serve relevance. Under uncertificated securities category, Swiss law defines three types of rights, such as participation rights, [49] property rights and credits. Traditionally, the only formal requirement [50] for creation of these securities is by keeping a book in which associated details are recorded. With the recent reforms, such a book (or register) can now be created on a blockchain system.

51

On the other hand, a general distinction is made between three token models, e.g. payment tokens, utility tokens and asset tokens. [51] Asset tokens refer to and represent physical assets, company equity, debt and rights such as dividends and interest payments. In their classification, the Swiss Financial Market Supervisory Authority (FINMA) also emphasises on substance over form of a given design. Essentially, asset tokens are seen analogous to equities, bonds and derivatives, from the perspective of their economic function. An asset token can take the form of a promise, e.g. in future capital flows.

52

For applicability of Swiss financial market and securities laws, an assessment would need to be made as to whether a token would confer claims or rights, such as ownership, in favour of the holder against its issuer or a third party. In addition, the type of the underlying asset referred to by a token, i.e. fiat currency, commodity, real estate or securities, carries importance. [52]

53

Furthermore, for tax purposes in Switzerland, asset tokens are often classified in distinct groups of debt tokens, equity tokens and participation tokens. [53] Concerning equity tokens, an investor’s entitlement would refer to a benefit, measured by a certain ratio to profit or liquidation result. In the case of participation tokens, on the other hand, investors would generally be entitled to a proportional share of a certain reference value defined by the issuer. Both equity tokens and participation tokens would be considered as derivative financial instruments in the context of taxation.

54

In the economic analysis of the proposed concept, it is suggested that tradable participation tokens are issued which “entail the right to vote on governance proposals and participate in future cash flows”. [54] In order to foster user adoption the vending machine would also distribute “micro participation rights to sellers and buyers through fractions of tokens”. [55] Here, “token holders could create proposals and cast votes in proportion to their token holdings,” whereby “a combination of cash flows and voting rights in the same token” is argued to “help align interests and incentivise token holders to act in the machine’s best interest”. [56]

55

In addition, “the right to open a slot in the vending machine is tokenised in the form of a non-fungible token (NFT)”, [57] whereby the vending machine would assume a custodian role, with the NFTs bearing redemption rights in favour of the assets placed in the slots. The NFTs are therefore seen to become tradable without the need for the physical displacement of the asset. Crucially, the vending machine is depicted as a “programmable safe deposit box with a large variety of use cases including collateralised loans, smart contract-based implementations of a last will and the issuance of sub-tokens which represent partial ownership of the NFT”. [58]

56

The proposed design as a participation token could arguably be interpreted as an asset token under FINMA definitions, bearing a derivative character. In other words, these participation tokens could then be considered as uncertificated register securities, whereby the transfer of these types of securities that are exclusively registered on a blockchain system is now permitted under Swiss law.

57

Notably, a form of security under Swiss law, when defined as a derivative or a financial contract, is where the price is set particularly according to a) assets such as shares, bonds, commodities etc., and b) reference values such as currencies, interest rates etc. [59] Also, derivatives are defined as financial contracts whose value depends on one or several underlying assets and which are not cash transactions. [60] These definitions clearly imply that a derivative would require bearing a price, which is set according to an underlying asset.

58

The participation tokens in the proposed concept would in principle only assume functionality by means of the underlying (implied) right to claim assets, such as participation in future cash flows and the right to vote on governance of the architecture. These tokens would form the effective embodiment of an uncertificated register security, issued by and subjected exclusively to the rules of the underlying network governed by BVM DAO. In other words, the derivative element would relate to the way value is constituted on the basis of the subject matter. Therefore, these participation tokens seem to bear a price given that investors are set to align their interests and to expect profit from the functioning of the vending machine.

59

Once caught under the uncertificated register security, where the electronic register will exclusively be integrated on blockchain systems, a contractual relationship would then need to be established in the form of a registration agreement between the issuer and the holder. Here identification of parties becomes pivotal, with the register potentially taking the role of ‘data controller’ under the Swiss data protection regime. [61] For the participation tokens to work on such a blockchain-based register, the identity of the holder at each point in time as well as the issuer, who is the obligor of the securitised rights, must be unambiguous at all times. In light of the challenges reflected in the sections above, this aspect furthers the difficulty of embedding an unincorporated DAO structure with pseudonymous members into the legal and financial system.

60

Furthermore, in the proposed tradable NFT as a tokenised right to open a slot on the machine, the latter will act as a trusted custodian of the physical goods aimed at guaranteeing an effective bridge between the on-chain and off-chain spaces. NFTs in general are not considered as securities. Here, NFTs represent deposited assets, i.e. physical goods held in custody by the vending machine. These cannot be considered as standardised within the meaning of a security, discussed above. In this context, the proposed concept also refers to the possibility of the “issuance of sub-tokens which represent partial ownership of the NFT”. [62] Division of the NFT into identical sub-tokens representing partial ownership, could be argued to constitute a standardised asset, provided that the number of these sub-tokens is higher than 20. [63] The sub-token holders would then be entitled to the right on the partial value represented by these tokens. These tokens could therefore be seen as derivatives, and consequently as securities.

61

Lastly, the assigned role of custodianship to the vending machine which may also act as a “programmable deposit box,” would inevitably have implications as to matters related to liability.

62

The analysis conducted in the preceding sections highlight that the current Swiss legal framework, both from a private and public law perspective, wrestles with the concept of an autonomously managed and largely pseudonymous marketplace. In addition, authors take the view that the recent regulatory reforms would certainly have an impact on the chosen token design, albeit outside the scope of this study.

63

Law primarily surrounds legal subjects, be it natural or legal persons, and confers rights and obligations to and in relation to them. With the proposed architecture as a blockchain-based peer-to-peer vending machine governed by a DAO, such legal subject is either entirely absent, as shown in the case of tax law, or it is hard to get a hold of, as shown in the section on private law analysis. Furthermore, from a criminal law perspective, establishing the required adequate causal link and wilfulness between the BVM DAO’s actions and the damage caused to the victim seems unrealistic in light of the high threshold Swiss legal doctrine has rightfully levied for criminal liability, specifically for omissions in case of a duty of care.

64

From a private law perspective, the fact that contracting parties have little to no factual recourse in case of a purchase of counterfeit goods is an undesirable state from a public policy perspective. Neither consumer protection, in the wider sense and not within the meaning of article 32 CPC, nor good faith in commercial dealings as a public policy interest is viably upheld in this scenario. [64]

65

From a public law perspective, on the other hand, the state faces insurmountable challenges in taxing and collecting the taxable transactions involving such architecture. Also, perpetrators of criminal offences, i.e., members of a DAO or unidentifiable associates of a DAO, such as Vendor X, could likely not be brought to justice—an outcome which directly infringes on the public good of legal protection and undermines trust in government. [65]

66

As shown above, with the existing Swiss legal framework, undue burdens are inflicted on market participants interacting with the vending machine on the one hand, and the state as the responsible authority to levy taxes and to prosecute crimes on the other hand. The afore-mentioned undesired results of Swiss private and public law in dealing with the described case study suggests that the existing Swiss legal framework is not adequate, which is why pillars for a new and more adequate framework are discussed below.

73

The first question is whether to address the identified challenges by expanding the numerus clausus of corporate and organisational forms to include a special DAO form (Approach 1). Alternatively, instead of legislating for a specific technology, to expand the concept of legal personality as a whole to comprise self-executing software-based agents, among others, DAOs, just as legal scholars have expanded the envelope of legal personality to encompass legal persons, centuries ago (Approach 2).

74

Approach 1 was chosen by the State of Vermont in an effort to create a legal framework for DAOs. As a practical matter, the Vermont legislator determined that the autonomous quality of DAOs merited greater safeguards than those of a traditional business entity. Vermont has explicitly accounted for the extension of the numerus clausus of corporate forms through the creation of a new entity type, namely blockchain-based limited liability companies (BBLLCs). [70]

75

This solution is seemingly suitable to deal with the regulatory challenges DAOs pose today, as they are by and large managed by humans, whereby the extent to which DAOs are actually governed ‘algorithmically,’ as suggested, [71] is contested. As such they are different from other non-code-based organisations such as stock corporations in degree, but not in kind. Therefore, introducing a new form of corporation taking into account some of DAOs idiosyncrasies would be a viable medium-term solution.

76

However, at the speed with which AI’s capabilities are increasing, [72] Approach 1 may become ineffective and obsolete sooner than one may think.

77

A midway approach, Approach 2, was chosen by the State of Wyoming legislators for the DAO Bill. [73] In recognising the speed at which AI is developing, the Wyoming DAO Bill introduces the concept of an ‘algorithmically managed’ DAO to deal with the challenge that future, non-human DAOs may pose without touching on the subject of legal personhood for digital software-based agents per se. Instead, under this framework non-human DAOs could be legally incorporated. More specifically, it is stipulated [74] that an algorithmically managed decentralised autonomous organisation may only form if the underlying smart contracts are able to be updated, modified or otherwise upgraded.

78

The distinction between algorithmically managed DAOs and non-algorithmically managed DAOs, i.e. ‘member-managed’, may seem prudent in light of future potencies of AI. However, vesting management powers to a smart contract in the case of ‘algorithmically managed’ DAOs may prove to be rather problematic in a legal sense. This is because the pseudonymity, or, on rare occasions, the anonymity, associated with smart contracts in the case of these DAOs would take away the necessary ‘safety valve’ and could therefore prove not to be sensible from a public policy perspective. Furthermore, the term ‘algorithmically managed’ is not precise enough and may thus be misleading as many gradations exist on the spectrum of human – AI interaction to which the bifurcated solution in the Wyoming DAO Bill does not cater. Also, algorithms can be found in any process, the law, chemistry or even a recipe. Therefore, building a legal framework around such polysemantic term is far from ideal.

79

Approach 2 is evidently more radical in nature, as it would introduce a new form of personhood as a whole by recognising digital persons next to natural persons and personhood for legal entities, and in some cases, nature bodies such as rivers. [75]

80

If we go back to the origins of legal personhood, it was the great jurist Karl Friedrich von Savigny, influenced by Kant’s considerations on legal capacity in metaphysics of morals, who stated that legal capacity could be expanded to encompass something without the single individual, i.e., by artificially construing a legal person. Here, Savigny proposed that legal capacity shall be expanded to artificial subjects, conceived solely via the power of fiction. This subject was called a “legal person”, i.e., a person who is assumed to exist exclusively for legal reasons. Thus, according to Savigny, a legal person is an artificially conceived subject capable of owning property. [76]

81

As of today, courts around the world have ruled on the limitations of rights awarded to legal persons and concluded that legal persons are not only capable of owning property but also capable of personality rights such as the right to a reputation and constitutional rights such as freedom of speech. [77]

82

According to article 53 CC, “legal entities have all the rights and duties other than those which presuppose intrinsically human attributes, as gender, age or kinship tributes, as gender, age or kinship, speech”.

83

Consequently, a self-executing digital entity such as a DAO could presumably be awarded legal personality with its algorithmic governance and execution of actions, given that it is arguably more self-reliant and is endowed with more agency than, e.g., a stock corporation which needs human agents for every step of the way when forming, communicating and executing decisions and actions. This is highlighted in the essay ‘The Advent of Digital Persons’ with a concrete example of a highly autonomous DAO:

In the near-term future, we will face digital entities who act autonomously on a transnational, distributed network and don’t always need a physical manifestation or representation to interact with natural or legal persons. They will manage funds, pay humans for labour, possess things and create other entities – independently of third-party involvement. We propose to accept these entities as autonomous, digital persons as they are endowed with no lesser level of autonomy than the legal persons we interact with on a daily basis. A legal entity relies on its organs comprised of humans, such as a board of directors, presidents, secretaries etc. to act as agents in the process of decision-making, and in the execution of these decisions on its behalf. Legal entities are therefore not autonomous agents. It is precisely the characteristic of agency in form of self-execution without the interference or need of a third party that gives digital entities the necessary level of autonomy to be regarded as digital persons. This does not mean that a digital person must be able to execute its will exclusively without a human being or another party. Especially in the analogue realm, a digital person would still need representation through a human surrogate. But given the current technological developments, the digital person can now act directly without human intermediation in e.g. employing humans and paying their salaries through smart contracts as well as autonomously managing its assets, including transactions of programmable funds.

Such is the case with Plantoids: Plantoids are blockchain-based lifeforms that reproduce through the combination of code and human interaction. The goal of a given Plantoid is to raise enough funds to be able to employ a human surrogate that then would produce the Plantoid’s offspring. In the example of the Plantoid, technology no longer acts as a tool but as a peer in a direct relationship with natural or legal persons. Similar to a natural person whose mind inhabits a body, each Plantoid consists of comparable components. On the one hand, its physical body in form of an electro-mechanical construction and on the other hand its “soul” – “represented by an autonomous software agent that lives on a blockchain”. If the physical body of the Plantoid is destroyed, the autonomous software agent – in the form of a smart contract – continues to live on the distributed network it was deployed on. [78] 

84

From this excerpt it can be concluded that the more non-human agency in the form of AI underlies a DAO, the more adequate Approach 2 may prove to be in legislating for DAOs.

85

No matter how intricate a legal framework for DAOs is created by any jurisdiction, the effectiveness of such approach would largely be determined by the legal standards in other jurisdictions. Therefore, unitary national or state-level approaches, such as Wyoming and Vermont, are welcomed but a worldwide uniform and standardised solution which would uphold a minimum liability standard and a framework for international cooperation, exchange of information and cross-border enforcement would be needed to tackle the issue effectively. Lessons can be drawn from effective international legal frameworks such as e.g., in the area of money laundering and terrorism financing, as pioneered by the Financial Action Task Force (FATF), an ad hoc membership body organised under the umbrella of the Organisation for Economic Cooperation and Development (OECD). To this end, civil society groups consisting of leading academics, such as the Coalition of Automated Legal Applications, are working on Model Laws, a helpful tool to set legal standards. [79]

86

Therefore, the paper takes the view that any legislative attempt for Switzerland ought to closely monitor and adequately reflect the research and findings from other legislative attempts around the world.

87

If we revisit the damage incurred to Buyer Y as well as the state as collector of taxes in part B, it was exclusively pecuniary in nature. This will be the case for most of the challenging cases we can currently conceive of in relation to DAOs which prompt the need for a novel legislative framework in the first place. Therefore, finding a sensible solution to make damaged parties financially whole when the interaction with a DAO has led to damages for which the DAO must then assume responsibility would be of utmost importance.

88

Just as contract law without the tools for international seizure of assets and enforcement of claims would be useless, even the most intricate legal framework for DAOs would be ineffective in the absence of any tools to seize and distribute assets to damaged parties. Hence, we argue, a legal framework for DAOs must include some form of collateral or minimum insurance requirement for DAOs before they may interact with market participants under an effective protection of a legal framework. With this, the characteristics of smart contracts as deterministic and immutable sets of codes can be used to favour consumers and other market participants who are in need of protection.

89

Even beyond a mere collateral requirement, allowing the state some kind of access to smart contracts, via for instance multi-signature function, where the state holds one of the needed cryptographic keys to transfer assets, governing DAOs may—albeit counter to the libertarian cypherpunk ideal—also be a suitable safeguard to ensure protection of market participants when transacting with DAOs.

90

Irrespective of the approach potentially chosen by Swiss legislators, Approaches 1 or 2, it is our opinion that the likes of the Wyoming DAO Bill, despite their apparent shortcomings, could inspire Switzerland to bring further legal certainty to such emerging novel business models and to better integrate existing concepts such as ‘unincorporated partnerships’ into its legal and regulatory landscape, thereby helping to achieve a fitting framework for these new business and organisation models, which are here to stay, according to our estimation.

91

To sum up, for any legislative effort, it is crucial that participants in the proposed open marketplace concept by Schär et al. are not left without effective legal recourse. To meet this requirement, we take the view that Swiss legislators need to act with bespoke legislative reform, partially taking account of existing legislation in foreign jurisdictions.

92

In the end, the fundamental need for a functioning legal system of knowing “who are you, with whom I have to deal with”, to put it in the words of Jeremy Bentham, must be catered to in any sensible legislative approach to tackle the issues and challenges raised herein, even with technical tools such as smart contracts at hand. Otherwise, individuals or non-human entities may escape regulatory supervision and legal accountability, a result which may erode trust and legitimacy in the state power as a whole.

Note: URL links were primarily accessed during the period of 1 November 2020 - 30 March 2021, excluding the recent related Swiss regulatory developments.

*by Benedikt Schuppli, Attorney-at-Law, blockchain entrepreneur, member of the Coalition of Automated Legal Applications "COALA"; Golnaz A. Jafari, LL.M., doctoral researcher at Lucernaiuris, University of Lucerne, Switzerland, formerly a research associate at SOCAI, University of Würzburg, Germany, & research fellow at NRCCL, University of Oslo, Norway and Golnaz A Jafari, LL.M., PhD Researcher at Lucernaiuris, University of Lucerne, Switzerland, Research Associate at SOCAI, University of Würzburg, Germany, and Research Fellow at NRCCL, University of Oslo, Norway.