Legal regulatory issues for DAOs

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Revision as of 17:41, 6 April 2023 by Craig Calcaterra (talk | contribs) (Created page with "There are many valuable blockchains and DHT networks holding digital financial tokens that are beginning to interface with traditional business. The question of how to legally regulate these instruments is a major challenge, because of the novel qualities of these tools and their network environment. == Overview == The digital tokens of greatest interest are Bitcoin, ETH, and the sub-tokens of Ethereum, typically fungible ERC-20 tokens<ref>Fabian Vogelsteller & Vitalik...")
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There are many valuable blockchains and DHT networks holding digital financial tokens that are beginning to interface with traditional business. The question of how to legally regulate these instruments is a major challenge, because of the novel qualities of these tools and their network environment.

Overview

The digital tokens of greatest interest are Bitcoin, ETH, and the sub-tokens of Ethereum, typically fungible ERC-20 tokens[1] representing ownership of DAOs and non-fungible ERC-721 tokens[2], called NFTs, representing ownership of individual properties.

These tokens fall under the financial instrument categories of equities, securities, commodities, and utilities. However, most current tokens are combinations of these types. For example, the basic token of the Ethereum network, ETH, confers on its owner the power of using the network for information processing and storage, because it is used to pay the network to run smart contracts. Therefore, the primary argument holds that ETH is a utility token. However, ETH has also been used in the past to make governance decisions.[3] Therefore ETH also has some properties of an equity in the quasi-corporation that is the Ethereum network. ETH also has some aspects of a security, since the governance design has chosen to limit the quantity of ETH in the hopes that it will grow in value.

There is an active legal argument concerning what type of financial instruments these tokens represent for the purposes of national and international regulation. However, since Ethereum is not centrally incorporated, its governance is not structured like any traditional corporation. Therefore its regulation arguably falls outside the scope of the SEC in the US or the ESMA in Europe.

REP tokens under DGF also overlap these financial categories and also act within these new types of for-profit groups, DAOs. These new international organizations require new approaches to regulation.

  1. ↑ Fabian Vogelsteller & Vitalik Buterin, "ERC-20: Token Standard" (2015 November 19) Ethereum Improvement Proposals. Retrieved 2023 April 7.
  2. ↑ William Entriken, Dieter Shirley, Jacob Evans & Natassia Sachs, "EIP-721: Non-Fungible Token Standard" (2018) Ethereum Improvement Proposals. Retrieved 2023, April 7.
  3. ↑ https://ethereum.org/en/governance/#who-is-involved Retrieved 2023, April 7.
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