Legislators in Australia want to regulate Decentralized Autonomous Organizations (DAO). In this three-part series, Oleksii Konashevych discusses the risks of suppressing the emerging phenomenon of DAOs and possible solutions.
Regulating a Decentralized Autonomous Organization (DAO) as a company means first of all registering it as a company. But who remembers why we need this registry in the first place? Will anyone question whether a blockchain-based DAO even requires registration?
Historically, the government took on the role of that trusted third party, keeping records of a company through its public authority – i.e. a registry office: who is responsible, its address, its constitution, shares and shareholders and so on. In the event of any legal question or dispute, the Registrar will refer to the Registry as the source of truth. Registration can be deleted if a company conducts illegal business. Registration is also required for taxation. The public registry keeps this data to ensure its authenticity and security.
Related: DAO Regulation in Australia: Problems and Solutions, Part 1
Today, the registry is electronic and needs reliable infrastructure: software and data centers, cyber security measures, etc. There are also formal rules and requirements for registration. So each record is checked against these rules. All this is the responsibility of the registry office.
Now let’s see what a blockchain is. This technology can provide an unprecedented level of protection for electronic records. Once a record has been published on a reliable blockchain, there is no way to tamper with it. Also, users publish and manage their data on a blockchain without intermediaries.
With blockchains, at least two functions of the registry office become superfluous:
● The registrar does not have to keep records – users can do this themselves.
● The registrar does not have to maintain the registry infrastructure.
And this can be the most worrying part for bureaucrats and backwards. Nobody is exactly responsible for maintaining the Ledger infrastructure. It is an open, self-organized and self-governing network without authority. Even after 14 years of successful work, people still do not believe and accept that this is happening.
For a DAO registration, we don’t need a traditional registry because the blockchain is the registry itself.
Related: Decentralization, DAOs and the current Web3 concerns
Which blockchain and the role of regulation
I should say that not every blockchain is reliable. And here comes the role of government in terms of regulation. First of all, private and permissioned ledgers — while referred to by many as “blockchains” — are not blockchains in the original sense of Satoshi Nakamoto’s invention. They are not immutable and decentralized. On the contrary, its design assumes that there is a controller, effectively making it a centralized technology, which I discuss in Private Distributed Ledger Technology or Public Blockchain?
The second problem lies with the blockchains themselves. Even though it is designed as a decentralized open network, there is a big difference between a network with, for example, three nodes and three thousand nodes. They have different levels of resilience to cyber threats.
So the government’s role is to put in regulations and standards to make sure people understand that when they publish a dataset – say on Ethereum – it becomes immutable and protected by thousands of running nodes around the world . Basically, if you post it on a private distributed ledger network controlled by a cartel, you have to rely on their goodwill.
The conclusion for this part of the discussion is as follows. With blockchain you don’t need an external registry database as blockchain is the registry and there is no need for the government to maintain this infrastructure as the blockchain network is self-sustaining. Users can publish and maintain records on a blockchain without a registrar, and there must be standards that allow us to distinguish reliable blockchain systems.
Today, registration procedures are highly formalized. I can’t recall any procedure being at the discretion of a registrar. All rules can and must be mastered by algorithms, removing a clerk from the record keeping process. In fact, in most cases it is already electronic and automated.
The difference is that this needs to be designed as a standard requirement for developing a compliant DAO. Those wishing to operate under Australian jurisdiction must code their decentralized applications and smart contacts to conform to these standards.
Related: In the Mind of Blockchain Developers: Creating a Free-to-Use Social DApp
There are two ways to incorporate a company: You can tailor your own company charter, articles of incorporation and other documents. But you have to do that if you opt for interchangeable rules (in some European countries this is called a model works constitution).
A real DAO works according to the “code is law” principle, as Larry Lessig wrote. There can be no replaceable rules written in a human language. But the rules themselves can and should be implemented digitally in the form of machine code and run and executed by computers.
Complications can arise when DAOs try to rely on code and text rules. The main concern is consistency. If there is a discrepancy between the written text of the law and the machine code, the computer cannot read and interpret the text – it executes the machine code.
Also, the problem is that records on a blockchain are immutable; You cannot change anything during the transitions, revoke a transaction, or change a provided code. I will address this issue in Part 3. The problem lies in the discrepancy. Since both the code and the text have the same legal force, this will potentially lead to a legal conflict. If the legislature establishes the unconditional supremacy of written text over machine code, they will destroy the whole idea of DAOs.
Related: The DAO is an important concept for 2022 and will revolutionize many industries
The correct demand is that regulators should not require DAOs to have their legal documents written in human language. It may sound unreasonable – there will be a temptation for politicians and bureaucrats to be paternalistic to protect customers – but that’s the whole idea of the emerging digital economy and innovations. Anyone who wants to enjoy the full power of blockchain technologies must have this right to experiment. In the end, nobody will be forced to do this because we will still have the classic business forms and the old registers.
Disintermediation and decentralization enabled by blockchain increase the efficiency of the economy and reduce multiple risks. Politicians should let industry develop the code is law paradigm as this is potentially a bigger future for our society.
There are many pitfalls along the way, and if we want that future, we must overcome them. Still, I don’t support crypto anarchy – it’s not a solution. Read about jurisdictions on blockchain in Part 3 of this series.
The views, thoughts, and opinions expressed herein are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Oleksiy Konashevich has a PhD in law, science and technology and is CEO of the Australian Institute for Digital Transformation. In his scientific work, he presented a concept for a new generation of land registries based on a blockchain. He pitched an idea of Title Token and backed it with technical protocols for smart law and digital government to enable full-featured legal governance of digitized property rights. He has also developed a cross-chain protocol that enables the use of multiple ledgers for a blockchain probate registry, which he presented to the Australian Senate in 2021.
https://cointelegraph.com/news/dao-regulation-in-australia-issues-and-solutions-part-2 Problems and Solutions, Part 2