Tuesday, January 31, 2023

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Managing personal liability risks associated with decentralised autonomous organisations

Decentralised autonomous organisations (DAOs) have been gaining popularity as digital member-owned organisations. Crucially, DAOs allow for decentralised decision-making and governance without involving banks or Government, a cornerstone of the Web3 Movement. One of the most significant risks associated with DAOs is personal liability. As a participant in a DAO, you could be held liable for any actions taken by the organisation, even if you did not personally authorise them. This can include anything from financial losses suffered by other participants to legal actions taken against the DAO. This article steps through how you can make your DAO risks more appealing to insurers, while helping to protect your assets in the process.

Understanding evolving risks

As with any new technology, there are potential risks and liabilities that must be considered and managed.  It is expected that governments will begin to regulate and provide legal clarity for DAOs in the coming year, which should help to provide more guidance for DAO participants (CoinDesk, 2022).

Obtaining insurance coverage that specifically addresses risks associated with participating in a DAO, such as Directors and Officers (D&O) insurance, is a sensible idea. However, it is worth noting that as insurers are inherently cautious about providing coverage for emerging risks, it may not be available in all cases.


Presenting a well-managed risk

To maximise your likelihood of securing insurance for risks associated with participating in a DAO, it is critical to present the organisation as a well-managed risk to insurers. This can be done by highlighting the governance protocols in place, which have the added benefits of minimising potential liabilities and protecting your assets.

Here are 4 key ways you can make your DAO risk more appealing to insurers:

  1. Establish governance protocols: Develop a clear set of rules and procedures that govern the operation of the DAO. This can include financial oversight, decision-making authority, and dispute resolution.
  2. Demonstrate financial stability: Provide detailed financial statements and reports that provide proof of the DAO's financial stability and ongoing viability.
  3. Highlight the experience of the individuals: Emphasise the qualifications, experience, and expertise of the individuals involved in the DAO, particularly those in leadership positions.
  4. Keep a risk register: Demonstrate that the DAO has a comprehensive risk management strategy in place, including a risk register (particularly where the DAO relies on smart contracts as insurers will pay particular attention to this aspect).


How we can help

An insurance broker with knowledge of blockchain and cryptocurrency risks can help you understand the factors that insurers will consider when evaluating the risks associated with a DAO. They can provide guidance on how to present your organisation in the most favourable light, and help you understand how the legal and regulatory landscape surrounding DAOs in your jurisdiction may impact your insurance coverage. They can also assist in identifying potential risks and tailor your insurance policy to meet your specific needs.


To find out more about managing the risks associated with participating in a DAO, please feel free to reach out at any time.

Travis Gauci

Head of Professionals


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