Israel aims for DAO regulation as it seeks regulatory control in Web3

After rolling out regulations for stablecoins and digital asset service providers, Israeli authorities are turning their attention to decentralized autonomous organizations (DAOs).

The country is looking to introduce uniform rules for the operation of DAOs in the country as part of its efforts to exercise greater control over the Web3 sector. Ahead of the incoming legal regime, the Ministry of Finance confirmed creating a multi-agency team to steer efforts at regulating the activities of DAOs in Israel.

DAOs are member-owned communities without a centralized leadership, with the organization’s governance run through tokens that confer voting rights.

In its official disclosure, the ministry noted that regulating DAOs will provide legal clarity while mitigating the risks associated with their operation. The newly minted agency is expected to enact regulations guiding the taxation and legal status of DAOs in Israel.

Ahead of the launch of new regulations, the Finance Ministry is seeking public opinion on the nature of regulations. The ministry’s public consultation is mainly aimed at academics and key players in the industry, urging them to submit their opinions on the benefits and potential downsides of integrating DAOs into the Israeli economy.

The public consultation is expected to continue until September 9, with the Finance Ministry pledging to incorporate submissions into the planned regulations for DAOs.

The incoming rules will be focused on clarifying the legal status of DAOs as corporate entities, launching tailor-made rules against money laundering, and regulations on minority holder protection.

While global regulators are turning their backs on stablecoins, Israel’s central bank is pushing for the use of stablecoins under strict guard rails to prevent misuse. The Israel Securities Authority (ISA) raised a motion proposing changes to the country’s capital market laws on digital currencies on the grounds that the existing legal framework failed to explicitly mention digital assets.

DAOs pose challenges for regulators

Since making their debut on the global stage with the mishandled purchase of an antique version of the U.S. Constitution in 2021, DAOs have posed significant challenges to regulators.

Regulators are struggling with the novel challenge of designating a legal status to DAOs and the civil and criminal liabilities for the organization.

Other challenges include security issues stemming from the difficulty in amending the DAO’s code once launched. DAOs are increasingly susceptible to hostile takeovers when a rogue participant garners enough tokens to gain voting control, as shown in the 2022 draining of Build Finance DAO.

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