Authors: Michael Bacina, Barbara Vrettos, Jade McGlynn, Luke Misthos
The latest legal, regulatory and project updates in Blockchain and Digital Law brought to you by Michael Bacina, Jade McGlynn and Luke Misthos of the Piper Alderman Blockchain Group.
Decentralised Autonomous Organisations (DAOs) are a relatively new way for people to organise and co-ordinate towards common goals, relying heavily on blockchain powered smart contracts and usually lacking a central owner/controller.
DAOs exist on a blockchain and decisions of members are made and recorded automatically using self-executing smart contracts. Entrusting the operation of a company to code and software may seem like walking down a path towards a Skynet for business, but in reality DAOs are an experimental and nascent space, albeit one that boasts many advantages as a modern means of business.
The Select Committee on Australia as a Technology and Financial Centre, chaired by Senator Andrew Bragg, recently released their final report (Bragg Report) which included at Recommendation 4:
The committee recommends that the Australian Government establish a new Decentralised Autonomous Organisation structure
The full report, which is available here, is filled with progressive and exciting developments for FinTech and digital assets. The report notes that a DAO structure is needed so that emerging types of blockchain-based organisations can operate in Australia with clarity and guidance.
DAOs have no leaders, board members or operations beyond what is mutually agreed upon by members in the smart contracts which govern the operation of a DAO. These software enforce rules can cover any aspect of operations, but usually relate to a treasury of digital assets held by the DAO and deployed in grants. No one person can control, profit or endanger the organisation as the model seeks to create a genuine distribution of power among members.
With lessons learned from the COVID-19 Pandemic, businesses were forced to adapt, realising the potential for at home work, and greater digital based collaboration. Global manufacturing, loans and peer-to-peer goods and services all stand to find improvements to their business models using a DAO elements.
While appealing in theory, the law has no formal recognition of DAOs at present. The Coalition of Automated Legal Applications (COALA) has published a DAO Model Law that aims to assist governments in crafting localised DAO laws to recognise a separate legal personality of DAOs. The Bragg Report refers to the COALA model as a useful starting point for developing a legal structure in Australia and encourages the Australian Government to examine this approach.
One of the issues of DAOs which the report addresses is that they are not recognised by law. This means they have no legal personality and cannot enter into contracts, sue, be sued in their own name.
COALAs' model notes blockchain already meets most of the regulatory requirements an organisation is required to comply with under many company laws. With tweaks, COALA believes all major principles and regulatory requirements of corporate governance can be met on a decentralised network and allow DAOs to exist as a new company model.
An industry wide shake-up of the limited liability company which has been used for hundreds of years is likely to encounter criticism. Without legal protection however, those operating within a DAO may be considered to be in a general partnership or some form of unincorporated association.
This means that where one member to the DAO commits a wrong, the other members, while perhaps being entirely innocent, could be liable at law. Pinpointing which individual is responsible for a wrongdoing could be a potential issue particularly given the lack of legal regulation and the way in which blockchain systems operate.
One thing is clear, if the Bragg Report's recommendations are adopted, Australia would not just catch-up to other jurisdictions regulating digital assets, it would move to the very forefront.
What Australia can learn from Wyoming's DAO Law
In April this year, Wyoming made headlines when its legislature approved a first-of-its-kind bill that determined individuals and organisations in the blockchain industry can create a legally recognised Decentralized Autonomous Organisation (DAO) in Wyoming. If countries are spurred to play catch-up and enact their own DAO related laws, like the recent Bragg Report recommends for Australia, the new type of organisation may no longer need to be viewed as a risky experiment but a possible corporate option.
DAOs (as described in the update above 'DAO Company on the Agenda'), are a new type of organisation that, instead of being governed by a central owner or group, operates on a distributed basis with no central authority or decision maker. This modern means of business is a new company structure that Bragg Report has recommended be created.
Since the DAO model first emerged, the series of benefits that an organisation without a centralised controller could provide has been recognised. But the unique features of a DAO has also meant that they operate without a specific legal framework and, as a result, are not given any legal personality at law. Without these protections the legal ownership of assets controlled by a DAO has been unclear, and a DAO can look a lot like a general partnership or unincorporated association, exposing its stakeholders to personal liability for any debts or legal actions against a member of the DAO. These are the core issues which need to be resolved by a DAO law so that emerging types of blockchain-based organisations can operate effectively in Australia.
Much like the DAO model law proposed by the Coalition Of Automated Legal Applications (COALA), Wyoming's DAO law attempts to resolve these issues. At a high-level, the Wyoming law prohibits lawsuits against DAOs as general partnerships and enforces the rights of DAOs as legal persons in state court to protect individual DAO members. As a result, the law extends traditional legal protections to DAO members in aims to minimise the risk of DAO members being held personally liable by a DAO.
That's not to say the new law has been free of criticisms. Since Wyoming’s recognition of DAOs, there have been some strong opinions shared on the law, including questions about the additional and allegedly unnecessary burdens it creates for DAOs, an "unsound definition of smart contracts" as a form of a constituent company document, and the law's lack of significant guidance for the ways in which a DAO company in Wyoming practically differs from a traditional company in Wyoming. The discourse is all useful if Australia wishes to follow Wyoming in formulating a DAO structure.
Comments from US lawyers note the approach of Wyoming's DAO legislation is to give maximum effect to the freedom of contract principle, including by waiving the fiduciary duties of DAO members by default. Under the new law, while members of traditional Wyoming companies still owe fiduciary duties of loyalty and care to the company and other members, DAO members participating in a DAO company are only subject to an implied contractual covenant of good faith and fair dealing.
Like the COALA model, the Wyoming Law will benefit from improvements as it is deployed and used. As is always the case, the law lags behind technology, but if DAO members are to enjoy limited liability protection this usual gap may need to converge.
ASIC sets a positive trajectory for an Australian Bitcoin ETF
Following the close of Consultation Paper 343: Crypto-assets as underlying assets for exchange traded products (ETPs) and other investment products in late July, ASIC's view on an Australian Bitcoin ETF has been revealed. ASIC has released guidance outlining their response and updated a number of existing regulatory guides. ASIC's response provides insight into ASIC's view about best practice for crypto-assets entering the regulated space noting the
near unanimous support for ETPs and other investment products that provide exposure to crypto assets.
In a media release detailing the update, ASIC Commissioner Cathie Armour said:
Crypto-assets have unique characteristics and risks that must be considered by product issuers and market operators in meeting their existing regulatory obligations.
ASIC's Report 705 outlines specific responses and submissions received, and significant changes have been made to INFO 225 and INFO 230. These include references to monitoring standards, custody of crypto-assets, pricing methodologies, disclosure and risk management where listed products are involved.
Report 705 is separated into 4 categories, being:
- Meeting INFO 230 'Exchange traded products: Admission guidelines' expectations;
- Responsible entity obligations;
- Listed investment entities; and
- AFS Licensing for a new kind of asset.
Despite Armour's statement, in accordance with ASIC's long standing regulatory policy the guidance attempts to remain technology neutral. This means limited reference to technology specific crypto asset requirements. ASIC prefers to issue guidance around best practice and leave the decision for admitting listed ETPs backed by crypto-assets to the market operators.
However, a key exception to this is the new category for AFS Licensing for registered managed investment schemes with the introduction of a crypto-asset specific category.
ASIC challenged submissions which noted the UK approach recognising crypto-assets given they carry the indicia of property but didn't give any specific reason why crypto-assets would not, absent other indicia, be simply treated as property. Oddly, ASIC stated that submissions had not convinced ASIC why crypto-assets should be treated as property as a starting point. The UK Jurisdiction Taskforce publication on this point is filled with reasoning on this front and it is disappointing to see ASIC fail to engage with what could have strengthened the legal standing of crypto assets generally.
ASIC notes commodities are not an existing asset kind in licensing frameworks and Said that designating crypto-assets as commodities would not solve the licensing issue.
ASIC has thus established 2 kinds of authorisations for applicants to apply for if they wish to operate a registered managed investment scheme holding digital assets, being either a:
- a 'named scheme' authorisation (whether the scheme holds one or more crypto assets) which means the licence holder would only be able to operate a specifically identified scheme; or
- a 'kind scheme' authorisation for applicants who have operated 2 named schemes for at least two years. Once granted this will allow licensees to operate multiple crypto-asset registered schemes without needing to vary their license with the introduction of each new scheme.
At present these options are only available for holding BTC or ETH.
Also of note are:
- Key features which have been identified for market operators to consider when approving ETPs;
- ASIC is not limiting crypto asset custodians to Australia and is not changing the existing class order regarding custody of scheme assets; and
- ASIC is not mandating any specific disclosures in disclosure documents relating to crypto assets.
This is an exciting shift for the regulation in crypto assets. The timing of the release is in quick succession with the Senate Report. It will be interesting to see whether the Senate Report is the impetus for other regulators to issue guidance in the near future.
CBA creates crypto capabilities for customers
The Commonwealth Bank of Australia (CBA) has today announced it will be creating a range of crypto capabilities for its 6.5 million-user banking app. Customers will be able to hold and use cryptocurrencies, like bitcoin, making CBA the first Australian bank to offer access to cryptocurrencies.
With only a few banks around the world offering this service, CBA has taken the first big step towards crypto banking in Australia. The perceived volatility of digital currencies and misunderstandings of risk has kept many traditional financial institutions away from the space.
However, with an increasing number of consumers interested in digital currency and regulation coming following the final report of the Senate Report into Australia as a Technology and Financial Centre (ATFC) it seems an opportune moment for banks and other financial service providers to offer crypto-related services.
According to an article by the Australian Financial Review (AFR), CBA is expected to confirm a partnership with crypto trading platform Gemini to facilitate the trading of digital assets and Chainalysis will form part of the offer in order to deal with compliance and intelligence services for transaction tracking. Chainalysis works to prevent cybercrime, tracks trends and assists in the seizing of stolen funds, using the highly traceable nature of blockchain payment systems to help identify illicit use of digital currencies.
With Australian crypto personalities entering the AFR Young Rich List in force and a Bitcoin ETF on the horizon, digital assets are further entering the mainstream. The AFR notes that the CBA seem to be moving to operate more like a technology platform than a traditional bank.
For users this means they will soon have the ability to pay bills, check balances, manage property, invest in shares and buy digital currency from one app, which may entice younger customers to use the CBA. The ATFC has opened the door for more institutions to prepare crypto-related services with the piece of mind that a regulatory framework is coming.
Should the ATFC's recommendations be embraced, the potential for digital assets to flourish further increases considering the protection that banks like CBA will be able to offer users. This will be particularly important as the CBA is looking to allow its users to pay for goods and services using digital assets down the track, per the AFR.
In a year of significant checkpoints for the digital asset industry, such as MasterCard and Visa vying for crypto-linked credit cards, and the White House considering a crypto Executive Order, the news that the CBA is looking to integrate crypto into their user-friendly systems is some of the most exciting news yet in Australia.
