DAO regulation in Australia: Issues and solutions, Part 2

Lawmakers in Australia want to regulate decentralized autonomous organizations (DAO). In this three-part series, Oleksii Konashevych discusses the risks of stifling the emerging phenomenon of DAOs and possible solutions.

Regulating a decentralized autonomous organization (DAO) as a company, first of all, means registration as a company. But who remembers why we need that registry in the first place? Will anyone question whether a blockchain-based DAO needs registration at all?

Historically, the government took the role of that trusted third party that, through its public agency — i.e., a registry office — keeps records about a company: who is in charge, its address, its constitution, shares and shareholders, and so on. In any legal issue or dispute, the registrar will take the registry as the source of truth. Registration can be canceled if a company does illegal business. Registration is also needed for taxation. The public registry body keeps this data, ensuring its authenticity and safety.

Related: DAO regulation in Australia: Issues and solutions, Part 1

Nowadays, the registry is electronic and needs reliable infrastructure: software and data centers, cybersecurity measures, etc. Besides, there are formal rules and requirements for the registration. So, each record is verified against these rules. All of this is the responsibility of the registry office.

Now let’s see what a blockchain is. This technology can ensure an unprecedented level of protection for electronic records. Once a record is published on a reliable blockchain, there is no way to tamper with it. Besides, users publish and manage their data on a blockchain without an intermediary.

So with blockchains, at least two functions of the registry office become redundant:

● The registrar does not need to make records — users can do it themselves.

● The registrar does not need to maintain the registry infrastructure.

And this can be the most concerning part for bureaucrats and retrogrades. No one is precisely responsible for maintaining the ledger infrastructure. It is an open, self-organized and self-governing network with no authority. Even after 14 years of successful work, people still do not believe and accept that this is happening.

We don’t need any conventional registry for a DAO registration 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 the government in terms of regulation. First of all, private and permissioned ledgers — even though crowds call them “blockchains” — are not blockchains in the original sense of Satoshi Nakamoto’s invention. They are not immutable and decentralized. On the contrary, their design supposes that there is a controlling body, effectively making it a centralized technology, which I wrote about in Private distributed ledger technology or public blockchain?

The second problem is with blockchains themselves. Even being designed as a decentralized open network, there is a big difference between a network with three nodes, for example, and three thousand nodes. They will have different levels of resilience to cyberthreats.

So, the role of the government is to introduce regulations and standards, to make sure that people understand that when they publish a record — say, on Ethereum — it will become immutable and protected by thousands of running nodes all around the globe. If you publish it on some private distributed ledger network controlled by a cartel, you basically need to rely on its goodwill.

The conclusion for this part of the discussion is the following. With blockchain, you don’t need any 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-sustainable. Users can publish and manage records on a blockchain without a registrar, and there must be standards that allow us to distinguish reliable blockchain systems.

Compliance

Nowadays, registration procedures are deeply formalized. I don’t remember any procedure that happens at the discretion of a registrar. All the rules can and must be governed by algorithms, thus removing a clerk from the process of making a record. In fact, in most cases, it is already electronic and automated.

The difference is that this must be designed as a standard requirement for the development of a compliant DAO. Those who desire to work under the Australian jurisdiction must develop the code of their decentralized applications and smart contacts compliant with these standards.

Related: Inside the blockchain developers’ mind: Building a free-to-use social DApp

Replaceable rules

There are two ways to create a company: You can tailor your own company constitution, a charter, and other documents. But you do have to do this if you opt into replaceable rules (in some European countries, it is called a model company constitution).

A true DAO will work under the principle of “code is law,” as Larry Lessig wrote. There cannot be such a thing as replaceable rules written in a human language. But the rules themselves can and should be digitally implemented in the form of a machine code, ran and executed by computers.

Complications can arise if DAOs try to rely on the code and textual rules. The main concern is consistency. If there is a discrepancy between the written legal text and the machine code, the computer will be unable to read and interpret the text — it will execute the machine code.

Moreso, the problem is that records on a blockchain are immutable; you cannot change anything in the history of transitions, revoke a transaction or change a deployed code. I will touch on this problem in Part 3. The problem is in the discrepancy. Having equal legal force in both, the code and the text will potentially create a legal conflict. If lawmakers establish unconditional supremacy of a written text over the machine code, they will kill the whole idea of DAOs.

Related: The DAO is a major concept for 2022 and will disrupt many industries

The correct call is that regulators should not introduce the obligation for DAOs to have their legal documents written in human language. It may sound unreasonable — there will be a temptation of politicians and bureaucrats to be paternalistic to protect customers — but this is the whole idea of the emerging digital economy and innovations. Those who want to enjoy the full power of blockchain technologies must have this right to experiment. At the end of the day, nobody is forced to do this because we will still have the conventional forms of business and old-fashioned registries.

Disintermediation and decentralization enabled by blockchain increase the economy’s efficiency and reduce multiple risks. Politicians should let the industry develop the “code is law” paradigm, as this is potentially a greater future for our society.

There are a lot of pitfalls on this path, and if we want that future, we’ll need to overcome them. Nevertheless, I don’t support crypto anarchy — this is not a solution. Read about jurisdictions on blockchain in Part 3 of this series.