Josh Frydenberg’s Crypto Firm Challenge

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Human nature being what it is, directors sometimes make decisions for their benefit that are detrimental to the interests of shareholders.

As with most blockchain infrastructures, DAO attempts to solve principal-agent issues by creating trustless relationships between participants. “Without trust” means not having to trust a real human. Instead, DAOs work through pre-programmed, automated smart contracts on a blockchain.

Human decisions interfere

Investors opt by transferring the cryptocurrency to DAO and receive DAO tokens. The investor’s crypto is owned by the DAO itself. Decisions (eg, change the DAO or make an investment) are made by a vote of all token holders.

There are no administrators to vote themselves extravagant bonuses and no managers to run away with company funds. Instead, DAOs are billed to operate “only with the steadfast iron will of unstoppable code.”

That’s the theory, anyway. Experience suggests that there are key human decision makers in DAO, as in any business.

In a 2017 investigation, the United States Securities and Exchange Commission found that, contrary to claims of decentralized governance, the voting rights of DAO token holders “did not give them significant control over the company” and they were “substantially dependent on management efforts.” »The founders of DAO and the persons appointed by them.

With billions of dollars in digital assets reportedly invested in DAOs, whose goals range from buying collectibles to trading in carbon markets, the question marks over the legal status of DAOs are a growing concern.

The Senate committee found that “the legal liability of members (i.e. token holders) for these organizations is currently unclear, and this regulatory uncertainty prevents the implementation of projects of a magnitude significant in Australia “. He therefore recommended to the government “to set up a new business structure with an Autonomous Decentralized Organization”.

In its response last month, the government accepted this recommendation in principle. He signaled the Treasury’s intention to consult with industry in the second half of 2022 on “an appropriate regulatory structure for new innovative business structures” such as DAOs.

Opportunities and challenges

Such a survey should address a wide range of questions, including: Should DAOs be recognized as separate legal persons, like corporations? Should DAO participants be protected by limited liability? For what purposes can a DAO be established? How should a DAO be taxed?

There is also the practical question of how Australian law might be enforced on a DAO with anonymous (more specifically, pseudonymous) participants who might be located largely (or entirely) overseas.

DAOs and associated blockchain technology may have the potential to disintermediate businesses, just as social media has disintermediated media.

But just as mainstream media has survived, adapted, and integrated social media, blockchain doesn’t necessarily herald the end of traditional business. Additionally, as with social media, crypto companies offer opportunities and challenges – business and social.

Crypto scams

One of those DAO challenges is completely old-fashioned: minimizing the risk of retail investors being taken to cleaners by shady operators. In their additional comments on the Senate report, participating Labor Senators were “concerned about the prevalence of scams based on crypto asset product offerings.”

In 2016, shortly after the creation of a first DAO, a hacker managed to transfer around a third of his holdings in cryptocurrency (then worth more than $ 50 million). This “exploit” was reversed by the extreme solution of essentially resetting the blockchain before the hack happened.

More recently, all of the $ 60 million ($ 83 million) invested in “canine-inspired” AnubisDAO has been diverted to unknown parties. Last month $ 130 million was stolen from BadgerDAO (inspired by a badger?).

The controversy over finance and business forms is nothing new, to say the least. Just over 300 years ago, the bursting of the South Sea Bubble resulted in a ban on new stock companies without a Royal Charter, under the Bubble Act 1720. (The ban was eventually lifted by the Bubble Companies, etc. Act 1825.)

Today, corporate fraud is woefully common, but no one would suggest abolishing businesses as a solution. Considering a new form of business, however, is an opportunity to get the right design to minimize risk.

The 1984 Gower Report warning of investor protection in the UK that it would be “harmful to the national interest and to reputation if regulations are so lax that we become a haven for crooks” is just as relevant to the times and to current technologies. .

Stephen Minas is Associate Professor in the School of Transnational Law at Peking University.

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