DAOs are a “healthy threat to governments and institutions” – a conversation with Joni Pirovich
The sentiment of decentralisation that underpins all crypto technology is increasingly winning favour across the mainstream, and is now starting to creep its way into the vocabulary of governments, with DAOs a regular topic of debate.
DAO is short for Decentralised Autonomous Organisation and is defined as an internet-native entity with no central leadership, with decisions made and governed by a community organised by smart contract enforced on the blockchain.
Despite only entering the business world within the last six years, DAOs have picked up enough momentum to be recognised as a possible framework of the future by a Senate Report on Australia as a Technology and Financial Centre.
The report released last year recommended that DAOs should be introduced in the Corporations Act to give DAO token holders limited liability. In response, the Federal Government stated that by the end of 2022, it will examine the potential of DAOs and how they can be incorporated in Australia’s legal and financial regulatory frameworks.
We spoke to Joni Pirovich, Principal lawyer of Blockchain and Digital Assets Services and Law, on the potential of DAOs in contributing to democracy, their place alongside traditional businesses and the role of regulation in decentralisation.
This interview was minted as an NFT by Joni Pirovich available here.
CryptoVista: Can you explain the value of DAOs in today’s world?
Joni: Today’s world is broken in many ways. In large part we do not have trust in governments and institutions – they are too big, opaque, layered and inefficient. DAOs give us hope that we can move to something better. In my mind, the value of a DAO is not just what it brings to the world but the value it represents by being part of an open source ecosystem with a trusted blockchain settlement layer.
DAOs are not just a new, community-first business model but also present a new way of thinking about how people and capital coordinate globally for things they care about. We are still discovering the true value of DAOs, and tokenomics and governance models.
CryptoVista: Where do you see potential for DAOs in shaping the function of national economies/democracies?
Joni: DAOs have incredible potential to shape the function of national economies and democracies. This potential is largely still not on the radar of governments but it should be.
The web2 concern was that the likes of Facebook and Google would have market capitalisations and user bases larger than sovereign governments, and that this was bad because of the centralised, undemocratically elected power in a few relative to the community of users and stakeholders. This was going to be especially bad if Facebook issued its own cryptocurrency to a global user base of ~2 billion people, taking fiat currency deposits away from the traditional banking system and away from the oversight of our regulators of monetary policy and financial stability.
In my view, DAOs have much greater potential than any web2 centralised business to accumulate large global communities, with more transparent means of voting. DAOs and their various models of governance are a healthy threat to governments and institutions, but can also provide insight on how decision making (and all the inputs and influence around how decisions are made) can be more democratic and responsive.
CryptoVista: When working with a decentralised body, how do regulations come into play? Is there a place for authority to guide DAOs and if so, how can a balance be maintained between the values of Web3 and systems/bodies of regulation?
Joni: The law doesn’t deal well with decentralisation that spans across multiple countries, nor evolving models of governance. The law is typically drafted to focus on an issuer that is resident in one country at the time of issue or of making a decision. This concept doesn’t hold well with sufficiently decentralised DAOs (at blockchain and application level) or protocols that continue to live on the blockchain without governance (e.g. v1 and v2 uniswap).
Each country wants to maintain its sovereign right to govern, issue financial services licences and levy taxes but I think this technology will necessitate a departure from this paradigm of thinking. Like the European Union is a supranational state my feeling is that other collections of countries may form supranational states to incentivise economic activity to that area if there cannot be a harmonious ceding of power to an international minimum standards body.
We are seeing this begin with the ‘network state’ concept, as well as the examples of Vanuatu issuing NFTs that represent a connection to the physical land and voting rights and Barbados signing a deal with Decentraland for sovereign Barbados virtual land.
There is a place for an international body such as the OECD (Organisation for Economic Cooperation and Development) to set some minimum standards for DAOs as well as for the industry to be more pro-active with industry standards and codes of conduct. The good actors are certainly trying to find pragmatic ways to protect their communities and keep them clean from money laundering and terrorism financing but there has not been enough enforcement actions against the bad actors.
Enforcement action and limited resources should be focussed on the bad actors as soon as possible because the longer they don’t the more confusion perpetuates in the community that they behaviour may be ok or legal when it is blatantly not.
A DAO may launch with an initial model of governance but we are already seeing that as a DAO’s community grows so too do the number of voices suggesting modifications to governance to better fulfil the DAO’s aims. Legal recognition of a DAO is required to give it the capacity to enter into contracts, hold property and offer limited liability. However, in my view, the legal recognition needs to ensure DAOs have flexibility to breathe, grow and learn but with a sunset date so the effectiveness of the law in promoting safe innovation with DAOs can be reviewed.
CryptoVista: What structural changes should businesses be considering as we move forward towards a decentralised Web?
Joni: DAO based business models are eating into the market share of existing centralised multinationals. Existing multinationals are already reaching out to me to figure out how to restructure to a DAO tax effectively (very hard if not impossible!).
Governments have not yet started reaching out (at least not to me) to understand the strategic threat posed by DAO based business models of eroding the global corporate tax base but where DAOs (particularly “x-to-earn” models) are concurrently building a decentralised ecosystem model to support a global universal basic income.
As stakeholder sentiment increasingly values transparency, it will become easier and easier for them to shift support from a centralised business to a decentralised one that likely increases their economic agency and financial wellbeing.
A key structural change that businesses should be considering now is how to be more transparent and how to contribute to the open-source global ecosystem. Their value is not just in themselves but where and how they fit in an open-source global ecosystem.