Ethereum and Smart Contracts

Next to Bitcoin, Ethereum is probably the most famous cryptocurrency. Contrary to Bitcoin, however, Ethereum's main focus is not on its use as a means of payment. Rather, Ethereum considers itself to be a platform for "smart contracts." In particular, the idea of ​​the autonomous company respectively the "Decentralized Autonomous Organization" (DAO) plays a key role.

Smart contracts are Internet-based contracts whose contract terms are determined by means of a programming language. After the contract has been concluded, it checks continuously and independently. Once this is the case, the other part automatically fulfills. This promises fast and cost-efficient contracts that mean significant added value.

A DAO is an collection of smart contracts that are executed independently and autonomously. There is no general manager or supervisory board that manages a DAO. It only has investors, who receive digital tokens from the DAO against payment of a contribution. These tokens carry voting rights, so that investors can vote on the organization's future actions.

What legal nature does such a DAO imply under civil law? A DAO is not a natural person and not a legal entity, either, since it is not recognized as such by any legislator. Under German law, they could best be described as a partnership under civil law, assuming German law would be applicable. This type of company arises when several persons pursue a common purpose.

Promoting a DAO should represent such a common purpose. As a consequence, all investors of a DAO would be its shareholders. Since a partnership under civil law has legal capacity, it could effectively enter into contracts and even sue and be sued. Would DAO investors then be personally liable? The classification of the DAO as a partnership under civil law would mean that all investors would be directly and unlimited liable for the company's liabilities, irrespective of the investors personal investment in the DAO.

While the legal framework of cryptocurrencies is slowly emerging, smart contracts are still new legal ground. Autonomous companies based on virtual currencies and smart contracts are even multiplying the legal question surrounding them. Anyone wanting to program a DAO by means of smart contracts or intending to participate in a DAO should obtain information about this uncertainty and the possible requirements and risks. In particular, the provisions concerning penalties and fines under finance law and the potential unlimited personal liability of (Ethereum) investors should not be accepted lightly.

Before you venture out into this unknown territory, we recommend a consultation with our lawyers, who have been supporting and helping shape the legal development of block chain-based innovations in Germany since the earliest days of Bitcoin.