“DAO manufacturing activities pollute local water”
“DAO manipulates LIBOR”
“DAO accused of workers rights abuses”
Whenever a new technology emerges, so much comes down to who becomes the defendant in a lawsuit when something goes wrong. Business models that supplied ‘platforms’ such as Airbnb and Uber are navigating these waters. Autonomous vehicles are en route.
Distributed Autonomous Organizations are not exempt: calls for regulation and standards will inevitably emerge—and for DAOs to become mainstream, such calls will need responses one way or another.
Slock.it recently announced it would not launch as a DAO. and instead will be hired by a DAO set up by someone else using money it raises in its own ICO. Why? Well, we don’t even know what launching a DAO really means.
DAOs may not be organizations per se
People have used the term ‘distributed autonomous organizations’ to describe a piece of code run by multiple parties with access to money. This code can initiate contracts on its own when certain conditions are met and verified. Such a program is not necessarily an organization.
Even Slock.it’s description should give one pause.
“A DAO is an organization that's self-governing and that isn't influenced by outside forces: its software operates on its own, with its bylaws immutably written on the blockchain, not controlled by its creators.”
The definition is somewhat self-referential. We could rewrite this to be “A DAO is a software application that operates on its own, with its code immutably written on the blockchain, not controlled by its creators.” Should this be a legal person?
In the example we gave in our DAO Introduction, the DAO could be thought of as a management tool rather than a separate entity. Today, banks are exploring integrating blockchains into their backend operations. The visionaries behind cryptocurrencies imagined a global money system free of oversight, not a tool for banks to be more efficient. DAOs could go a similar route: not autonomous organizations but an automated project management tool.
DAOs may not be autonomous either
DAOs are software code run on a distributed network with the ability to access assets on that network. This code isn’t really autonomous in the sense of being an AI that is processing complex information.
For example, the DAO doesn’t evaluate each of the proposals in depth using evolving algorithms. Instead, it asks its members to vote, letting each of them apply their own criteria. For other types of decisions, such as verification or work or selection of Curators, it relies on people.
This doesn’t appear to be describing an autonomous entity.
Regulation of Core Activities
This language matters for regulation. DAOs aren’t really a legal thing yet. They not even be legal organizations and it may not be autonomous either. It’s not clear what in what legal box they would fit.
The challenge of regulating DAOs would be identifying how its activities match the way we currently regulate such activities.
Sweeping away the jargon leaves a set of activities and relationships that occur on an open blockchain. In each activity, a DAO enters into a relationship with someone or something else, and the nature of this relationship will need to be clarified.
- Are code developers considered ‘owners’? Are they liable for the DAO’s activities? Do they retain influence over them?
- Are the developers of the underlying platform or protocol considered owners? Are they liable for a DAO’s activities?
- Do network nodes have some legal relationship with DAOs? If they run its code, are they 'accomplices' - and as such, should there be new KYC or 'Know Your Code' laws?
- Are people hired by the DAO for its activities considered employees and subject to employment-protections laws?
- Are people who buy a DAO’s coins considered legal shareholders? Are DAO coins considered securities for purposes of ownership?
- Do oracles have some legal relationship with DAOs? Are they liable for the DAO’s actions?
- How are expenses treated for purposes of tax collection? Are profits from coins considered capital gains?
These are difficult questions that we will need to wrestle with as what a DAO really is becomes more clear.
Launching a DAO sounds sexy. It's equally as risky, because none of these questions have been answered.
Could regulators shut down a DAO? Yes
One inevitable question is whether any regulating entity could enforce regulation? At first glance, the answer should be yes, with a similar playbook regulators used to shove file sharing out of the mainstream.
There are three weaknesses in current DAO design that give regulators tools to enforce compliance with any existing or proposed laws.
- Reliance on the network to run the code. A DAO relies on other computers running its code to continue operating. Heavy persecution of such nodes could encourage other nodes to stop verifying transactions, effectively locking a DAO out of the network.
- Reliance on oracles. Many DAOs will ultimately rely on some human input for decisions or to confirm that certain conditions for transactions are made. If it initiated a contract to plant trees, how would it know when trees have been planted? At present, the easiest solution is to ask enough trusted humans. Seeking input from a set of humans might be needed to handle situations not already programmed in its
- Reliance on digital money. Bitcoins each have a unique code, and as such, they can be blacklisted. In much the same way governments can freeze assets, they could put all digital currency touched by the DAO on a blacklist and threaten persecution of future holders.
All of the above would essentially starve the DAO of what it needs to run: computers to run its code, human input to accommodate changing conditions, and funds to pay people for activities.
The above wouldn’t necessarily shut down a particular DAO. Rogue nodes, oracles, and subcontractors could still help it run, much like file-sharing and Silk Road-like marketplaces still operate. But being like the Silk Road isn’t the long-term vision for DAOs – it’s being like IBM, Barclays, or Walmart.
These possibilities make regulatory questions even more relevant,
Distributed Autonomous ???
It’s not clear what a DAO really will be. Calling software applications on Ethereum 'organizations' might force us into conceptual corners. It’s possible that the distributed code won’t be considered a legal entity at all.
Let's wait and see what activities DAO visionaries are imagining - then identify where regulation (of organizations or other areas of law) might play an important role.