Business

Problems and Solutions, Part 3

Legislators in Australia want to regulate Decentralized Autonomous Organizations (DAOs). In this three-part series, Oleksii Konashevych discusses the risks of suppressing the emerging phenomenon of DAOs and possible solutions.

Crypto anarchy is unlikely to be the future that the majority of people support. In essence, business regulation has many positive aspects, or at least good intentions, albeit often embodied in a bureaucracy that stifles business. However, business rules and regulations are now formalized enough to be plugged into machine code. So the government’s role is to set mandatory standards for those DAOs that wish to operate in the Australian market.

Not digital

There are cases where a written legal text is required. These are situations where the legal interaction goes beyond the program code and requires integration into the real world. In this case, there must be formal legal documents and a liable person responsible for making business promises to consumers and investors.

blank

There can be two types of events in a blockchain network: 1. Internal. For example, transferring a token in exchange for a cryptocurrency payment. It can be fully automated as both elements – the token and the cryptocurrency – are internal digital elements of the system. 2. External. But when something is off-network, it requires human interaction and interaction with the real world.

For example, if a businessman issues tokens tied to a flock of sheep, that legal condition must be written somewhere in human language, since sheep are not digital objects and the legal condition is not part of the network. Therefore, investors’ digital rights (let’s call it that) can and should be automated in a DAO. Therefore, they do not require written legal conditions. Non-digital rights and obligations must be mediated by a responsible person and described in a legal document. And I would say that many DAOs will have both: the digital on-chain part and the off-chain part.

Related: DAO Regulation in Australia: Problems and Solutions, Part 1

Let me show you an example. Suppose it is promised that token investors can vote and the voting is done electronically on the blockchain and the smart contract automatically executes the decision in a decentralized manner. In this case, no human assistance is required and no formalized legal document is required. This does not mean that it is not described in human language. This means that the description does not override the machine code on the blockchain.

blank

As a legislator, I would enact rules that would reduce the opportunities for misinforming DAO investors. A businessman may not promise anything to DAO investors that is not encoded in the smart contract. This must be interpreted as a deception.

When the digital world touches reality and cannot act autonomously, all of these cases require full, legally binding disclosure.

Blockchain immutability

There is a common misconception regarding the issue of immutability. In a blockchain, you cannot subsequently change existing transactions and the provided code of a smart contract. That’s right, but you don’t have to. The system must be properly designed.

Instead of changing the existing records, you need to be able to add new records. All transactions are strictly chronological (because nobody can change the order of the blocks). So when legal circumstances change, don’t change the past, add a new record to your application. And in the order of records, only the most recent will reflect the current state of affairs. This allows you to resolve litigation and correct mere mistakes. And how to properly arrange legal relationships, I explained in the following video.

In my research papers, as well as in this video, I have also described the problem of an “emergency brake” – the need to reset the system when something goes wrong. The proposed technical standard will allow redesign of an application on blockchain and will introduce new rules for a DAO.

Related: DAO Regulation in Australia: Problems and Solutions, Part 2

A sustainable DAO solution must rely to some extent on third parties for governance and day-to-day operations. And there are many situations where we undeniably need a trusted third party. For example, how does a person transfer an inheritance after death? You are not going to develop a mature application on a blockchain, the question is how to hold intermediaries accountable, be it a government registrar or an authorized professional (lawyer, administrator, broker, etc.). Their operation requires regulations and technical standards.

I should note one important thing. Transactions with cryptocurrency as a native unit of a blockchain are immutable and there is nothing you can do about it. This isn’t addressable, or at least not that easily without breaking the technology. Everything I said about the right design revolves around crypto tokens, smart contracts, DApps and DAOs that are on top of a cryptocurrency.

To enter the age of the digital economy, governments need to rethink their role and approaches to regulation. The DAO portrays the struggle for a fundamental shift from old-fashioned bureaucracy and bureaucracy to automated procedures facilitated by smart laws and smart contracts, commonly known as the Code is Law paradigm. Such a shift requires questioning established institutions: the role of public registers, licensing and other avenues of conventional regulation.

Some countries have already entered the race to regulate innovation and good intentions are not enough as they end up with bureaucracy, which is one of the reasons DAOs came into existence in the first place.

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 submitted to the Australian Senate in 2021.