Rising interest rates and a general economic downturn in 2022 have impacted the value of digital assets, including the relatively well-established likes of Bitcoin and Ether. In addition to market headwinds, momentum around federal regulation of digital assets is building, culminating in the proposed “Responsible Financial Innovation Act” (the “RFIA”). The RFIA would, among other things, clarify the treatment of Decentralized Autonomous Organizations (“DAOs”) and create a new class of assets – “Ancillary Assets” – which would encompass most digital assets (including those that qualify as contracts). investment), and be regulated as commodities by the CFTC.1>
Despite the market downturn, and perhaps in response to movement at the federal level, the Ohio Legislature made digital assets a legislative priority in 2022. First, Ohio Bill 177.05 (“HB 177.05 ”) was adopted in March. HB 177.05 grants Ohio government entities the authority to take advantage of distributed ledger technology (“DLT”). A second bill, House Bill 585 (“HB 585”), would codify the legal status of DAOs in Ohio and Special Purpose Depository Institutions (“SPDI”) if passed.
There are important nuances to consider when market regulatory forces collide and the repercussions of these collisions ripple throughout blockchain technology and the digital asset ecosystem.
II. Analyze statuses: HB 177.05 and HB 585
a. HB 177.05: Ohio and DLT
Prior to HB 177.05, Ohio government entities were limited in how they could take advantage of DLT. Adoption was relegated to half-armed pet projects, including when, in 2018, Ohio became the first state to allow Bitcoin tax collection through OhioCrypto.com.2 Then-Treasurer Josh Mandel led the effort, ostensibly to solidify Ohio as a blockchain technology destination for entrepreneurs, investors and early adopters. Despite some early momentum, OhioCrypto.com shut down in 2019 after fears the platform was created illegally.3
Now, with the adoption of HB 177.05, government entities are explicitly permitted to leverage DLT, including blockchain technology, so long as such use is “in the exercise of [such
governmental entity’s] authority.” 4 The scope of “governmental entity” is broad, including any “political subdivision” as defined in Section 2744.01 of the Ohio Revised Code, thus capturing all instruments of the state of the Ohio, including any “municipal corporation, township, county school district, or other corporate and political person responsible for governmental activities in a geographic area smaller than that of the State.”5>
HB 177.05 regains the momentum lost by the failure of OhioCrypto by giving government entities the leeway to explore the innovative solutions and applications offered by DLT, even if tax collection remains an unviable use case. This momentum comes at an opportune time, as companies, including large public companies, are devoting significant resources to exploring the applications of blockchain technology to governance. HB 177.05 gives Ohio a competitive advantage over states ignoring the increase in alternative DLT use cases.6 Companies dedicated to exploring alternative DLT use cases can now find Ohio an acceptable sandbox in which to play.
B. HB 585: Ohio ODA
Operating or joining a DAO has always been a risky venture. If enacted, HB 585 would clarify and codify the legal status of DAOs in Ohio.seven
Under HB 585, all DAOs incorporated in Ohio would be required to file articles of incorporation with the Ohio Secretary of State, similar to how a limited liability company would be organized.8 It would be at this stage – initial organization – that the organizers would indicate whether the DAO will be managed by its members (similar to a limited liability company) or managed algorithmically.9 Additionally, if an Ohio-formed DAO chooses to leverage smart contract technology, the organization’s bylaws must include a publicly available identifier of any such smart contract.ten
Critically, the Ohio DAOs would not have the ability to define what constitutes a quorum on their own.11 A quorum is achieved only when fifty percent of the members of the DAO approve an action.12> Further, to the extent that an Ohio DAO leverages smart contract technology as part of its management, such contract must “be capable of being updated, modified, or otherwise upgraded.”13 Viewed critically, both of these provisions could signal skeptical governance through smart contracts. Alternatively, it can be seen as a critical adoption of smart contract technology as a means of corporate governance – similar to articles of incorporation or an operating agreement, each of which must be disclosed to shareholders of a company or organization. a limited liability company as the case may be. perhaps, smart contracts simply join a long line of governance mechanisms, each of which must be approved by participants in their respective business forms.
If passed, HB 585 will position Ohio as a destination for DAO training and the first state in the Midwest to codify DAOs.14That said, in order to maintain a competitive advantage, the Ohio Legislature will need to consider increasing flexibility around the governance of the DAO, much as the Wyoming Legislature did when it recently passed an amendment allowing DAO of Wyoming set themselves a quorum.15 This amendment allows Wyoming DAOs to scale faster, a priority for developers and investors. As developers seek out opportunities, jurisdictions that fail to adapt to scale logistics may fall behind.
C. HB 585: SPDI
In addition to codifying DAOs, HB 585 would allow for the formation of SPDIs, entities formed to provide custodial services on digital assets.16 By allowing the creation of SPDI, HB 585 would open Ohio to current and potential entrepreneurs seeking to serve as custodians of digital assets (including cryptocurrencies). The bill distinguishes three categories of crypto-assets:
(1) “Consumer digital assets”,
(2) “Digital Securities” and
(3) “Virtual currencies”.17
“Consumer digital assets” are defined broadly, including any digital asset “used or purchased primarily for consumption, personal or household purposes”18 as well as any “open blockchain token constituting intangible personal property as provided by law” and “any other digital asset that is not a digital value or virtual currency”. This definition would likely encompass non-fungible tokens (commonly referred to as NFTs), as long as NFTs are not used for speculative or investment purposes. “Digital securities” would include any digital “investment good”.19 “Virtual currencies” would include any digital asset used as currency not recognized as legal tender in the United States.20
In addition to classifying digital assets, HB 585 contains numerous provisions that reduce the risks associated with SPDI, including the following requirements:
- SPDIs would be required to hold highly liquid reserves guaranteeing 100% of the assets on deposit, as well as to pledge the assets or provide bonding to the Ohio Department of Commerce.21
- Reserves should be held in the form of U.S. dollars locally, currency held at a Federal Reserve Bank or FDIC-insured financial institution, or other highly liquid investments such as treasury bills.22
- Any group wishing to charter a SPDI will need to raise a minimum of $10,000,000 in fully paid up share capital.23
If passed, HB 585 would position Ohio as an early leader in meeting the growing demand for crypto services. SPDIs would provide institutional legitimacy to crypto-holders incorporated or doing business in Ohio, helping to meet the growing demand for regulatory clarity and fostering a crypto-asset market in Ohio.
As the value of cryptocurrencies and other digital assets continue to decline in response to market forces, the importance of alternative use cases for DLT, including DAOs, will grow. DLT, and more specifically blockchain technology, offers unique solutions for governance, back-office operations, supply chain maintenance, and other functions outside of simply storing value.
So-called “overhead” states, such as Ohio, have the opportunity to attract market players and the digital asset ecosystem by passing comprehensive digital asset legislation before or alongside federal legislation. As it was when it was part of the Northwest Territories, the passage of HB 177.05 and the proposed HB 585 position Ohio on the cusp of a new frontier.
*Tanner Dowdy is a summer partner at Dinsmore & Shohl, LLP, and is not licensed to practice law.
1. Responsible Financial Innovation Act, S. 4356, 117th Congress (2022).
2. Cryptocurrency for Ohio Tax PaymentsBlockchain Research Institute, (May 2019), https://www.blockchainresearchinstitute.org/wp-content/uploads/2019/06/Marke-Cryptocurrency-for-Tax.pdf.
4 House Bill 177The Ohio Legislative Assembly, https://www.legislature.ohio.gov/legislation/legislation-summary?id=GA134-HB-177.
5 ORC 2744.01
seven House Bill 585The Ohio Legislative Assembly, https://www.legislature.ohio.gov/legislation/legislation-summary?id=GA134-HB-585.
14 Research Institute, above note 12.
15 Troutman Pepper, Wyoming Changes DAO Legislation Allowing DAOs to Dictate Quorum Threshold on an Individual BasisJDSUPRA (May 5, 2022).
16 internal bill, above note 11.
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