By Nicola Taljaard
On 15 February 2023, the Mauritius Financial Services Commission (“FSC”), the integrated non-banking financial services and global business sector regulator, in line with its transparent regulatory policy-making process, issued its draft Guidance Notes on Decentralised Autonomous Organisations[1] (“draft Guidance Notes”) for public consultation. The FSC has invited all interested parties to send their comments to the draft Guidance Notes to the FSC by 28 February 2023.
The draft Guidance Notes divide DAOs into two general groups, namely those linked to a legal entity and those not linked to a legal entity. In the former group, the legal structure of DAOs will allow it official legal status which would give it capacity to sue and be sued, deal in movable or immovable property, have liability for such things as bodies corporate may lawfully do and be liable, and benefit from limited liability protection.
The draft Guidance Notes essentially seek to serve as guidance to the legal structures which DAOs in Mauritius can rely on and delineate the minimum standards that are expected of DAOs that intend on obtaining limited liability and legal personality status in Mauritius. Notably, the draft Guidance Notes provide that “any non-observance of these Guidance Notes may entail regulatory actions”. Particularly, where the FSC has directed that specific person(s) must comply with the Guidance Notes, once final, non-compliance will constitute an offence.
Should DAOs wish to connect their organisations to a Mauritian legal entity, they may adopt any legal structure, including a limited partnership, foundation or limited liability partnership, each of which is a hybrid model. The benefit of a hybrid model approach in the context of DAOs is that such models allow DAOs flexibility in terms of internal organisational structure while also permitting the relevant entity the features of corporate legal personality and limited liability status.
The requirements that DAOs will need to comply with include:
- specifying its “DAO” status in its founding documentation and registered name;
- describing it as a DAO in such documents (and more specifically, if it is an algorithmically managed DAO instead of a member manager DAO, it must have a publicly accessible identifier of any smart contract used for its functioning);
- having a designated representative agent responsible for filing, communications with Authorities and maintaining the DAO’s records, located in Mauritius at all times; (own emphasis)
- having a duly FSC-registered agent or other person resident in Mauritius for the above purpose, and
- adhering to service requirements.
In terms of the operation of DAOs, the draft Guidance Notes provide that DAOs may provide their governance through blockchain technology and sets out further obligations by DAOs. These obligations include a duty to have in an operational contract, policies and procedures, and protocols to respond to security breaches in relation to its systems or any other unauthorised actions that may affect the integrity of the blockchain technology they use.
Furthermore, according to the draft Guidance Notes, DAOs shall be managed by their members or by the relevant smart contract, unless otherwise provided. Such members – who may also embody other roles such as traders, miners and/or developers, will not, unless expressly stated otherwise, have a fiduciary duty to the company or its members, but will remain subject to a general covenant of good faith and fair dealing.
In relation to governance processes, DAOs shall adopt reasonable algorithmic mechanisms for purposes of obtaining consensus for record validation on the blockchain as well as governance tokens for conducting operation or making organisational decisions, and will further be required to update such procedures as may be necessary over time.
More generally, the draft Guidance Notes provide that DAOs must obtain the requisite licenses, authorisations and registrations or approvals it may need to conduct specific business and must adhere to anti-money laundering and combatting the financing of terrorism obligations under the Financial Intelligence and Anti-Money Laundering Act as if it were an ordinary financial institution as per the Act’s definition. In instances where DAOs use the digital issuing of tokens to raise funds from members, tokens are to be considered “security tokens” which fall subject to the Securities Act and Regulations or FSC Rules.
Similarly, where DAOs offer virtual tokens to the public in exchange for fiat currency or other virtual assets, the DAO is deemed to have issued an initial token offering and would need to register under the Virtual Asset and Initial Token Offering Services Act.
For the full draft Guidance Notes, click here.
[1] In accordance with the draft Guidance Notes, Decentralised Autonomous Organisations (“DAOs”) are blockchain-based organisations whose activities and decision-making are co-ordinated by self-executing codes, also known as smart contracts.
