Japan’s Financial Services Agency Grants Limited Rights to DAO Member Tokens, Easing Regulations

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Japan‘s Financial Services Agency (FSA) aimed to facilitate the development of decentralized autonomous organizations (DAOs) and clarify the legal framework surrounding them.

The FSA has proposed a new amendment to the definition of Article 2 of the Financial Instruments and Exchange Act in a move to provide clarity on the legal nature, operational rules, member responsibilities, ownership, and tax relationships of DAOs.

The amendment is known as the “Cabinet Office Ordinance (Draft) Amending Part of the Cabinet Office Ordinance Concerning the Definitions Provided in Article 2 of the Financial Instruments and Exchange Act,” according to a report from Coinpost.

DAO Tokens to Receive the Same Treatment as LLC Rights

The proposed amendment aims to grant a specific token called the “Limited Company Type DAO Employee Rights Token” the same treatment as regular limited liability company (LLC) member rights.

By doing so, the FSA intends to ease regulations on employee rights in tokenized LLCs and streamline the operations of DAOs.

The FSA is currently seeking public comments on the proposed amendment until March 4th.

Once the necessary procedures are completed, the amendment will be promulgated and implemented, providing a more defined legal status for DAOs in Japan.

合同会社型DAOのルール形成がまた一歩前進。#web3PT

金融庁:本件は、トークン化された合同会社等の社員権について、一定の場合には通常の合同会社等の社員権と同等の規制とするための所要の改正を行うものです。https://t.co/uF5gFtZazw

— 平将明（たいらまさあき/Taira Masaaki） (@TAIRAMASAAKI) February 2, 2024

DAOs, enabled by blockchain technology and communication tools, have emerged as a means of community management.

However, the lack of clear legal status poses risks of unexpected legal application and hinders the smooth formation and operation of DAOs.

Furthermore, having a well-defined legal status is believed to enhance trust and facilitate smoother transactions for DAOs in their external activities.

While creating new laws specifically for DAOs is a time-consuming process, utilizing existing legal forms can offer a practical approach to clarify their legal position and promote their use, the report said.

“By establishing and operating a DAO as a limited liability company, it is possible to give the DAO legal personality, clarify the limited liability of its members, realize flexible organizational management through self-governance in the articles of incorporation, and clarify tax treatment.”

Japan Conducts DAO Rulemaking Hackathon

In line with the efforts to develop a legal framework for limited liability company-type DAOs, the Liberal Democratic Party’s Digital Society Promotion Headquarters, and the web3 project team conducted a “DAO Rulemaking Hackathon” at the end of last year.

They received issues and requests from multiple companies, organizations, and investors, which were then submitted as recommendations to the Minister of Finance, per the report.

Last year, the country’s National Tax Agency also revealed that it has revised its law to exempt crypto token issuers from 30% corporate taxes on unrealized gains, effective from June 20.

At the time, Prime Minister Fumio Kishida said the move was aimed at boosting its blockchain and crypto sectors amid a push for “new capitalism.”

Crypto investors will still be liable to pay a maximum of 55% income tax on any earnings over JPY200,000 ($1,797) related to cryptocurrency, classified as “miscellaneous income.”

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