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Rage Comment : As the world's most funded project, DAO (decentralized anonymous organization), which has raised 150 million yuan, can bring great innovation and improve our lives. DAO is a decentralized anonymous organization built on the Ethereum network. Thanks to the open principle of Ethereum, various experiments can be carried out. The difference between DAO and DO is that DAO cannot manage itself and needs to be voted by participants to make decisions. Before formulating relevant policies and systems, regulators must fully understand their risks and benefits, conduct tests, and then formulate the most suitable regulatory system. The legal issues of DOs are very complicated, and we need to have comprehensive discussions and communications with policymakers to make the right decisions.
Translation: Nicole When I was discussing Ethereum with my colleagues a week ago, I knew that the DAO was inevitable. We didn't think that the risks and benefits would all come from this new experiment, but we finally agreed on one point: the DAO network has become weird again. No matter how you look at the DAO, you have to admit that the concept is very novel: there is a software hanging on the Internet that is the DAO, controlling $150 million. History shows that things that start out weird often end up leading to huge innovations that improve our lives; this is a strange and exciting journey from weird to common, and hopefully there will be fewer obstacles along the way. By Peter Van Valkenburgh The DAO has grown rapidly and is now the poster child for (A) the excitement of open networks for financial innovation and (B) the dangers of growing too fast, causing disruption to many things. So let’s take a step back and look at what all of this means and why it’s impactful from a public policy perspective. Here are the key points based on the facts about Ethereum and DAOs and public policy:
Ethereum is open to all innovation and experimentation. Perhaps the most exciting thing about the Ethereum platform — and cryptocurrency in general — is its principle of being completely open to experimentation. No patents or copyright issues to fight over, no universities to get jobs from, no expensive membership fees to pay. Anyone with a computer and an internet connection can develop and contribute their own currencies, financial contracts, strategies, and visions for the future.
Ethereum is a platform, not a product. It is a set of software standards and shared computing power, the purpose of which is to enable collective computing. Like the personal computer and the Internet, they are useless in themselves, but they are a way for users to access applications and for developers to design and share new applications (e.g., word processing applications are available only because of the personal computer platform, and websites are available only because of the Internet).
· Applications running on the Ethereum platform are called Apps. Applications developed and run on the Ethereum platform are called decentralized Apps or Dapps for short. Decentralization is due to the fact that application nodes are run on many computers, and the nodes on each computer make up the decentralized Ethereum platform; the application will not only run on a certain computer (that is, the server) in the network (as most cloud service Internet applications do now). They can provide users with various services, from online games to network verification, reputation management and even insurance or energy trading. Click this link to view more Dapps development applications.
DOs and DAOs are also Dapps. The community is still sorting out these terms, but the simplest explanation is that a large number of user-run organizations are called decentralized organizations or DOs. Users manage the DO by holding DO tokens or owning certain private keys, and in turn the DO software has the power to vote on what needs to be done (unlike Google Docs, which require permission - there is no centralized server controlled by a single computer). Alternatively, if a Dapp can manage itself without the help of other users or owners (the software code determines all internal management), then it is a decentralized anonymous organization or DAO. According to these definitions, The DAO (the Dapp that raised about $150 million in funding and dominated the headlines) is not a DAO, but a DO, because it cannot manage itself and its decisions rely on the votes of The DAO token holders. Confused yet? Don't worry, just remember that DO and DAO are used interchangeably by the community to refer to Ethereum applications with internal management mechanisms. The following article will analyze DOs specifically because it has a broader classification.
People invest in DOs to get returns. Like a fund or company, DOs can absorb value, produce value, and provide returns to investors. We can think of companies and DOs as entities with financial inputs (investments) and outputs (dividends). The main difference between DOs and companies is that the value flow map and method of DOs are embedded in the system in advance and are reviewed and tested. In other words, before you invest money in a DO, you can see the code that manages the money. The rule is: if most investors invest in project A instead of project B, then project A will be carried out.
People can also lose the money they put into DOs. Just as when you back a new gadget launched on an online crowdfunding site, or invest in the stock of a public company, you can be disappointed with the results. The product can fail, and the company can lose money.
The situation in traditional crowdfunding or securities investment, where information asymmetry causes risks, is different from that in DOs. When we invest in traditional companies, we don’t know how the funds will be used. Before we invest in a DO, the “smart contract” will program in detail how the funds will be used. The voting rules of the DO mean that we are not sure how other participants will vote, or whether external inputs from market prices will use internal funds, but the system rules of the DO software must be detailed before receiving funds.
DOs are an important experiment in community management. Fundamentally, DOs are trying to build a community based on rules and integrate the resources of all members. Unlike traditional communities, where rules are written in human language and enforced by courts or norms, the rules of DO communities are written in software code and enforced by decentralized computing platforms that use digital currency and economic incentives to prevent fraud. Members who join DOs also take risks, but also provide rewards to society: they provide a valuable experiment to test new models of community organization based on software, which can prove whether they are better than the current structure built on legal regulations. Like other new inventions and scientific discoveries, we don’t know what benefits or risks this invention will bring without research and development.
To the extent that DOs are subject to current securities laws, a wait-and-see approach to developing regulation is the best option for now. DOs present a higher risk of information asymmetry than traditional securities institutions. The internal investment structure is certain because the rules for the use of investment funds are pre-built into the software code. However, many people are not aware of these codes, and vulnerabilities in the software may not be detected until unintended consequences occur. These functions pose unique challenges for regulators and (once they are fully understood) it will be necessary to eventually eliminate investor risks with new regulatory mechanisms that are better suited to the technology than traditional tools. However, it is not clear what the risks are and new regulation is not ready. As a valuable social experiment, the current system should not restrict the functions of small-scale DOs, at least until policymakers can figure out what the risks and rewards are so that appropriate regulation can be specified. During the experiment, the best regulatory policy is to make investors and consumers aware of the risks of new and untested systems.
Just as it is important for policymakers to understand DOs, there are some issues that developers need to be aware of when formulating policy. We are lawyers, but we are not your lawyers, and the legal issues surrounding DOs are complex and need to be resolved. That said, we will flag the main regulatory hazards in this area. With securities laws and possible future legal interpretations as background information, the following content needs to be kept in mind by developers and participants. · The test for what qualifies as a regulated security is the US Howey test: "An investment contract for the purposes of the Securities Act means a contract, transaction, or scheme under which a person [1] invests his money in [2] a general enterprise [3] with the expectation of obtaining a profit [4] solely through the participation of a promoter or third party, [excluding factors] which are not substantive, whether or not the shares in the enterprise are evidenced by certificates or par value."
· Some investments will not be considered securities because they are securities that are deemed to be securities by the courts. For example, various sales of goods or property (i.e., orangeries, minks, condominiums, country club memberships) become securities with maintenance and income-sharing agreements attached, charging promoters a fee for issuing unregistered securities.
Ethereum and similar decentralized computing platforms appear to be immune from securities laws. While ether transactions involve an investment of money and the expectation of profit, there is commonality between the companies (due to the decentralized nature of the network and participants) and the tokens can be used for purposes other than investment (much like an apartment or co-op is initially purchased for personal use rather than just investment). Read more about the regulatory framework for digital currencies as securities at Coin Center.
· However, DO token transactions may be more suitable for securities issuance. Compared with Ethereum, there are fewer contributors to DO software and market efficiency. These profits are closely related to the value of the token, and investors rely on the efforts of these contributors to make profits. In addition, sometimes DO token buyers have little interest in holding tokens, but are instead driven by profit.
The Securities Act intentionally defines “promoter” broadly: “any person who, alone or in association with others, directly or indirectly, takes the initiative to find a promoter of a business or enterprise.” Given the broad definition of the term, developers should carefully weigh the obvious risks of offering and selling DO tokens.
Individuals believed to be promoters of DOs may be violating Sections 5(a) and (c) of the Securities Act. Under these sections, it is unlawful to directly or indirectly deal in an unregistered security, or to deliver an unregistered security after a transaction. Even if a DO is believed to be an unregistered security, it is unclear how promoting a DO would not be considered illegal activity and would violate the law.
However, a broad interpretation of these laws also includes any participant or affiliated developer or supporter. So as always, if you have concerns about whether the law applies to your work, you should consult with your attorney. Again, Coin Center is happy to help with this effort. We believe these new technologies will make the world a better place, and no new technology is without risk. Our goal is to share this vision and explain these risks to policymakers fairly and accurately so that they can make the right decision: protect the freedom to innovate and intervene only when real risks arise. So if you already have a new app, Dapp, DO or DAO, and want to help policymakers discuss policy together, we are happy to discuss it.
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