Introduction

Estonia, a northern European state that is trying to develop an e-state within its ‘physical boundaries’ has made significant strides in transferring many state functions to the digital space. It provides the service of public goods online. For example, digital voting, digital banking, e-residency for business, digital governance, etc. This shows that digital governance is possible both practically and politically.

Now, assume that in future, Estonia is captured and its government displaced. Despite that, the Estonian government can continue to perform its functions uninterruptedly through digital platforms. This idea of e-state in this digital era becomes important as it helps the nations develop their own communities and cultures, and avoid disputes related to territory, resources and competing assertions from neighbouring states.

The review of literature reveals that the scope of statehood as enshrined under Article 1 of the Montevideo convention of 1933 [“Convention”], is wide enough to include cyber nations within its definition, and should be made more flexible with progression of time. The goal of this piece is to explain the modality of digital statehood that fits within the domain of international law, which reduces the reliance on the international community. Though it is commonly believed that an entity to establish itself as a state must have a distinct physical boundary, this article will argue that the same is flexible in application.

Examining the Legal Status of E-states

For a country to become a part of the international legal system, it is necessary to classify it as a “state”. Article 1 of the Convention provides the criteria to determine statehood under international law.  It gives four prongs to determine the statehood of any entity: (1) a permanent population, (2) a defined territory, (3) a government, & (4) the capacity to enter into relations with other states. Though this convention is not binding, there is a worldwide consensus under Article 38(1)(c) of the International Court of Justice [“ICJ”] Statute that these criteria are the primary indicators to determine the statehood of any entity.

In light of these indicators, this piece explores whether Decentralized autonomous organizations [“DAO”], that works on decentralized computer systems and blockchain, can be granted statehood under the said Convention. This piece tries to explore whether Article 1 of the Convention is wide enough to allow states to transition their governance system to online and digital platforms and thereby retain their status as states.

DAO Fulfilling the Montevideo Convention

In the following section, we will argue how these DAOs can establish themselves as “state” according to the Convention.

Permanent Population

The first essential criterion for an entity to be declared a ‘state’ would be the element of ‘Permanent Population’. The legal backing for this criterion comes from the case of Western Sahara where the ICJ had established the importance of permanent population as a key to attain statehood. DAOs fulfil this requirement as they consist of a distinguished digital population that are the computer sources and systems of people who are technically the concerned members of these organisations.

The members come together in DAOs having a common cognisant and particular objective in mind, be it about championing human rights or other things. The permanency of DAO lies in the continuity of the DAO’s existence, sustained by the ongoing participation of its members. DAOs have members who become a community of people with common goals and objectives and who actively participate in the working of the organization. The population will not cease to exist until the time the objectives lined by that particular DAO are achieved.

DAOs are a contemporary and advancing concept, and their characteristics are established by the principles of decentralization, transparency, and community participation within the digital realm. The predominant scholarly opinion however is that “A group of individuals performing a specific goal or activity is not the sole criterion for attaining the right of permanent population. This status must also be substantiated by the functions it needs to perform to establish a legal basis.”

For instance, consider the case of the Holy See and Vatican City. Vatican City lacks a permanent population aside from Church functionaries and exists solely to support the work of the Holy See. Italy carries out a substantial number of administrative functions concerning the City, making it complex to establish a permanent population in this context. (Malcolm Shaw) Conversely, in the case of DAOs, the digital population undertakes all functions and activities of the organization, whether administrative or governmental. Thus, DAOs are likely to establish themselves as having a permanent population.

Defined Territory

The second important aspect regarding statehood would be the availability of a defined territory in the territorial space. The need for a defined territory focuses upon the requirement for a particular territorial base upon which to operate. However, there is no necessity in international law for defined and settled boundaries (Malcolm Shaw). Consider the case of Palestine, which, despite not having settled boundaries, is still recognized as a sovereign state by many countries. This thereby give an edge to the scholars and advocates of international law to mould the ambit of defined territory so as to include the concept of other territories as well.

This paper makes an argument of extending the concept of the second criteria of the Convention to include both physical and digital territories. DAOs work upon the concept of blockchain or digital territory comprising definite smart contract addresses to distinguish between them. A similar corollary can be drawn for instance with, Google Meet, Zoom, or other video conferencing applications to have a stronger grasp of the concept of defined territory. Within the context of online meetings, one could portray Google Meet as a blockchain platform and the meeting rooms of the application as individual and distinct DAOs working on that network. In this analogy, Google Meet serves as a holistic blockchain infrastructure, providing a secure and decentralized environment for various interactions. Each meeting room, similar to a DAO, functions as a distinguished entity with its own set of rules and participants that work collectively to reach a particular goal.

The comparison also extends to the concept of a unique smart contract address of each DAO that acts as the constitution to them, ensuring distinctive functionalities of each of them and satisfying a clear demarcation. The aforementioned analogy is backed by the availability of different ‘hash’ code and hash numbers in the blockchain, which are useful in determining the particular coordinate in the blockchain.

Governance

DAOs operate on the principle of community governance, meaning that administrative and governmental functions are performed collectively by the participants, rather than being centralized. Its procedure can be explained under:

1. Legislative (Law-making): This function within DAOs is achieved through the codification of rules in smart contracts. Members govern the organization via agreed-upon rules coded into smart contracts stored on the blockchain. These contracts outline the activities of the DAO participants and can be created or modified by consensus. Any member can propose changes or actions by submitting a proposal in the form of a smart contract. DAO members vote on these proposals, and the specific voting mechanisms may vary between DAOs. The process ensures that all members have a say in the rulemaking and policy formulation, fostering a democratic and transparent governance structure.
2. Executive: Once a proposal is accepted, the corresponding smart contract is automatically executed by the blockchain. The execution rules are predefined, ensuring that the autonomous code is enforced without external intervention. This automation ensures that the agreed-upon actions are implemented efficiently and transparently, reducing the need for traditional managerial oversight and minimizing the risk of human error or bias.
3. Judiciary: If a member fails to abide by the rules in the smart contract, the DAO’s judicial mechanism provides remedies such as loss of voting rights, removal from the DAO, or financial penalties. Disputes can be resolved through community governance or arbitration mechanisms. This ensures that there are consequences for non-compliance and that the integrity of the DAO is maintained. The judiciary function within a DAO is crucial for maintaining trust and order, providing a structured way to handle conflicts and enforce rules.

Capacity to enter into legal relations

DAOs have entities known as legal wrappers which are the legal frameworks of the DAOs that work so as to limit the liability of the organisations in contracting legal agreements and to represent them in the court of law when any dispute arises. In recent times as well, there has been a growing trend of DAOs getting legal recognition as an LLC or Limited Liability Company. It means that in cases of disputes not all the members of the organization will be liable but that it will have its distinct juristic personality. Even if an entity gains international legal status, this alone is insufficient for it to enter into relations with other countries.

A key distinction between a state and any other legal entity is sovereignty and independence from external control. States possess supreme authority within their territories, enabling them to govern, enforce laws, and conduct international diplomacy autonomously. Companies, however, operate under the legal frameworks of the states where they are registered or conduct business, lacking such sovereignty.

DAOs operate through codes and smart contracts binding only their members. These internal rules do not extend beyond the DAO’s membership, and the DAO does not have the authority to enforce laws outside its own community.

Additionally, valid legal recognition by other countries is essential for statehood. This recognition, affirming an entity’s status as a state, is unlikely for commercial entities like companies, as they do not fulfill the necessary characteristics and functions of a state, such as sovereignty and governance, which is subsequently discussed.

Recognition of DAOs as State

There are myriads of theories and doctrines in international law backing the claim of the grant of statehood through the recognition of an entity by different states and nations. The erstwhile theory in this sphere would be the ‘Estrada Doctrine of State Recognition’. According to this doctrine, recognition of a state is expected based on its de facto existence and not on its legitimacy. The virtual existence of DAOs on blockchain networks and their capacity to have an international legal personality establish their de facto existence.

On the other hand, the most advanced or rather latest development in the concept of recognition would be the ‘Constitutive theory of Recognition’ which is implied by several scholars as statehood based on recognition alone. Many countries, as well as International Organizations, have imparted legal status to DAOs in international law, equalizing them with the authority of any state.  For instance, ‘Wyoming’ becoming the first state in the USA to grant LLC personality to DAOs, as one of the precedents in this respect.

Conclusion

The idea of virtual nations is becoming more popular as technology develops. Nowadays, we can do almost everything online, which is helping us move towards a world where virtual communities are just as important as real ones. An example of this is how many countries want to start using UPI payments, which could help connect the world’s economy online.

However, this does not mean that countries will stop existing in the real world, that people won’t argue over land anymore, or that politics doesn’t need physical places. But as the rapid digitalization continues, we may need to reconsider our understanding of what constitutes a state. In certain circumstances in the future, the Montevideo Convention could be interpreted to include virtual nations, especially DAOs, to make the system open to e-states.

This article has been written by Arjun Maheshwari and Samarth Varshney from RMNLU.

[Ed Note: The article has been co-edited & coordinated by Ajinkyaraj Pacharaney & Hamza Khan from our Student Editorial Team.]