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Achieving a balance between censorship resistance and regulatory compliance - Otroms rules and blockchain.

October 2, 2018

This is a continuation of our blog series about implementing Ostroms rules on blockchain tech to scale decentralized organizations. This time we will look at her rule which says that the design of the organization must ensure the rule-making rights of community members are respected by outside authorities.


As blockchains by their very nature are censorship resistant, and this characteristic is inherited by the DAOs that operate on top of them, authorities are somewhat forced to accept the rules made by members of organizations that operate on a blockchain. However, this characteristic only applies once members are interacting with the blockchain or have already ceded to the crypto economy. Where members from the analogue economy desire to become members of a DAO (via purchasing cryptocurrencies) they must do so via old economy on-ramps that are subject to regulations determined by sovereign governments. Although there are sovereign outliers with cryptocurrency regulations ranging from outright bans to no regulations at all, in the majority of countries the definition of cryptocurrencies falls into one of the following buckets.

 

1/ Digital currencies such as bitcoin that are used as money and which are regulated by regulators that are concerned with preventing money laundering and tax avoidance.

2/ Tokens that represent Securities and/or financial products and which are regulated by the same regulators and also regulators such as ASIC in Australia that are concerned with protecting investors interests.

 

Of these two, it is the second that is closest to what is required by DAOs operating on blockchains and it is a significant impediment requiring innovators to operate under licenses that can only be obtained by organizations that can prove that they have experience in operating such enterprises and who have significant financial means.

This is however an alternate model that appears to have received very little consideration. Co-operatives

 

Within Australia and many places around the world, commons businesses operate as a trading cooperative and these are regulated by state governments under a national framework. Cooperatives allow members to pool resources with other members, and operates for their benefit. Members share investment, operational risks, all the benefits, and any losses. Additionally, cooperatives are required to demonstrate ongoing compliance to seven cooperative principles to be registered. ("What is a co-operative? - Business Council of Co-operatives and Mutuals", 2018) Similar to a corporation, a trading cooperative must raise capital by issuing shares, can operate a business to make a profit for its members and can distribute dividends. Unlike a corporation, a cooperative is a democracy where 1 member = 1 vote and they have different regulatory obligations and restrictions. ("What is a co-operative? - Business Council of Co-operatives and Mutuals", 2018)

 

Some authors (Scott, 2016) hypothesize on specific use cases such as the issuance of cooperative shares and/or membership rights on block chains, speculating about “a city network of informal street vendors run a collective mutual insurance pool between themselves using only their smartphones to interact with a distributed ledger system, with no central financial institution involved “.

 

It is arguable that co-operative model is a better mechanism to operate a DAO and that DAO can automate and scale co-operative governance. The problem with cooperatives is that the relevant laws were written when communities were bounded by geography and they have not been evolved to account for digital communities where membership is not bound by geography. Once these laws are changed it is likely that they will provide the best mechanism for achieving regulatory compliance of DAOs and that the mechanism required to operate these organizations – such as share, membership registries, voting and audit reporting will be integral to the DAOs code.

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