Digital Assets & Virtual Assets
RWA Tokenisation in Hong Kong: Legal Framework and Structuring Guide
Introduction
Decentralised autonomous organisations (DAOs) have emerged as a novel form of organisational structure in the Web3 ecosystem. Governed by smart contracts on a blockchain, DAOs allow token holders to vote on proposals, manage treasuries, and direct the activities of a protocol without a traditional corporate hierarchy.
Despite their technological novelty, DAOs must operate within existing legal frameworks. In Hong Kong, the question of a DAO's legal status—whether it has legal personality, can enter contracts, hold property, or be sued—has not been addressed by statute. This creates significant legal uncertainty for DAO participants, particularly regarding personal liability for the actions of the DAO.
This article examines the legal status of DAOs under Hong Kong law, the liability risks for DAO participants, and the strategies available for formalising DAO structures.
What Is a DAO?
A DAO is an organisation whose rules are encoded in smart contracts on a blockchain. Governance decisions (such as protocol upgrades, treasury allocations, and parameter changes) are made by token holders voting on proposals. There is typically no central management and, in fully decentralised DAOs, no identifiable group of persons exercising control.
DAOs vary widely in their degree of decentralisation. Some DAOs have identifiable development teams, foundations, or governance councils that exercise meaningful control. Others are governed entirely through on-chain voting with no identifiable human decision-maker.
Legal Personality of DAOs
Under Hong Kong law, legal personality is conferred by statute (e.g., incorporation under the Companies Ordinance) or, in the case of trusts, arises from the law of equity. A DAO that has not been incorporated or registered with any authority has no recognised legal personality in Hong Kong.
Without legal personality, a DAO cannot:
- Enter into contracts in its own name
- Hold property (bank accounts, intellectual property, real estate)
- Sue or be sued in its own name
- Employ staff or engage contractors
This creates practical problems for DAOs that need to enter into commercial arrangements, hold treasury assets in regulated bank accounts, or engage in regulated activities.
Liability of DAO Participants
The absence of legal personality does not mean that DAO participants face no legal exposure—it may mean that the exposure is greater than they realise.
Partnership Liability
Under Hong Kong law, if two or more persons carry on a business in common with a view to profit, they may constitute a partnership under the Partnership Ordinance (Cap. 38), regardless of whether they intended to form a partnership. If a DAO is characterised as a partnership, all general partners are jointly and severally liable for the debts and obligations of the partnership. In a large DAO with thousands of token holders, this could theoretically expose every active participant to unlimited personal liability.
The risk of partnership characterisation is highest where DAO token holders actively participate in governance votes, receive economic returns from the protocol, and are engaged in activities that could constitute carrying on a business in common.
Regulatory Liability
If a DAO engages in regulated activities under the SFO or AMLO without the required licences, liability may attach to those who control, manage, or direct the DAO's activities. The SFC has signalled that it will look through the decentralised label to identify those who exercise meaningful control over a protocol and hold them accountable.
Strategies for Formalising DAO Structures
Foundation Wrapper
Many DAOs have established offshore foundations (typically in the Cayman Islands, British Virgin Islands, or Panama) to hold DAO treasury assets, enter into contracts, and engage service providers. The foundation holds assets for the benefit of the DAO community and acts on the mandate of governance votes. This structure provides legal personality and limits the liability exposure of token holders.
Hong Kong Company
A DAO that wishes to have a Hong Kong legal presence can incorporate a company limited by guarantee (or a company limited by shares) in Hong Kong to serve as a legal vehicle. The company's articles of association and shareholders' agreement can incorporate governance mechanisms that reflect on-chain voting outcomes.
Cayman Exempted Company
For DAOs raising capital from investors, a Cayman Islands exempted company or limited partnership may be used to hold treasury assets, issue tokens, and engage in regulatory-compliant governance structures.
Regulatory Engagement
DAOs operating in the virtual asset space in Hong Kong should engage proactively with the SFC to understand their regulatory obligations. The SFC's approach to DeFi regulation—which looks through technological form to economic substance—means that DAOs providing financial services to Hong Kong persons may be required to obtain VASP licences or SFC authorisation, regardless of their decentralised architecture.
Conclusion
DAOs occupy a legal grey area in Hong Kong. Without a dedicated DAO statute, participants face the risk of partnership characterisation and unlimited personal liability, and DAOs cannot easily hold assets or enter into contracts. The most practical solution for DAOs with significant operations is to establish a formal legal wrapper—whether a foundation, a Hong Kong company, or an offshore entity—to provide legal certainty and protect participants from personal liability.
Alan Wong LLP advises Web3 projects, DAOs, and digital asset businesses on governance structures, legal entity formation, regulatory compliance, and smart contract legal frameworks in Hong Kong. Contact us to discuss how to formalise your DAO's legal structure.
