Legal regulatory issues for DAOs

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.

DAOs use the new technology of P2P communication and distributed computing to make decentralized organization practical on an international scale with pseudonymous participants. This poses a challenge to the traditional notion of jurisdiction. Legal systems have historically been designed to regulate society at the level neighborhoods, cities, states, and nations. More sophisticated governance processes are necessary to regulate the global fluidity of business that is enabled by contemporary and emerging technologies.

Smart contracts are automated business contracts between arbitrary parties on scales previously unimagined by traditional regulatory bodies. Programmed smart contracts execute at the speed of electricity from the scale of micro-second transactions for arbitrary fractions of money, to the global scale of millions of platform members transferring trillions of dollars over the course of a year. Our traditional regulatory bodies are inadequate for governing the use of just-in-time, AI-enabled smart contract authoring. With each new advance in technological capability, the demand grows for more sophisticated regulation.

New regulatory systems that interface directly with the technology is needed. DGF is designed to confront these problems by using these new technologies while including human backstops, to help DAOs design governance that hopefully meets and exceeds any traditional standards of regulation.

Token regulation as financial instruments

The digital tokens of greatest interest are Bitcoin, ETH, and the sub-tokens of Ethereum, typically fungible ERC-20 tokens representing ownership of DAOs and non-fungible ERC-721 tokens, 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. 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.

REP tokenomics

Main page: Reputation tokenomics

Clarity regarding regulation of REP tokens and DAOs can be improved using the valuations available from the study of reputation tokenomics.