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    10:12 AM Samuel Chan (LL.B. Candidate, Singapore Management University)

    Event Note: Digitalisation and Decentralisation: The Future of Corporations

        

    To explore the ever-growing impact of technology on corporate law, the Singapore Management University Law Academy, the Singapore Management University Centre for Commercial Law in Asia, and the University of Melbourne Centre for Corporate Law jointly organised a webinar on 11 October 2021 to discuss the increasing use of decentralized autonomous organisations (DAOs) and the associated legal and regulatory challenges. The event also marked the launch of the book, Technology and Corporate Law: How Innovation Shapes Corporate Activity (Elgar Publishing, 2021), edited by Andrew Godwin, Lee Pey Woan, and Rosemary Teele Langford.

    The Honourable Judge of Appeal Justice Andrew Phang delivered the opening address for the event, where he highlighted the relentless march of technology and the need for the legal industry to grapple fearlessly with its accompanying challenges. He noted that the new book not only deals with the impact of technology on the law but also raises important questions on the role of technology in the corporate context. In doing so, the book makes a significant and thought-provoking contribution to the literature on this emerging field. 

    Associate Professor Rosemary Langford thanked Justice Phang for his kind words and outlined the component parts of the book, noting also that technology is dominating corporate law discourse.

    The webinar then turned to the panel discussion on DAOs proper. The panel of experts, comprising Dr Andrew Godwin, Mr Saw Tiong Tjin, Mr Leong Weng Tat, Ms Lock Yin Mei, and Ms Urszula McCormack, shared their thoughts on the existing frameworks and possible future developments.

    What are DAOs?

    First, Dr Godwin kickstarted the discussion with an overview of the current technological backdrop and the main concepts inherent in DAOs. He recognized that digital technology has been taken to a new level by blockchain and smart contracts. The former is designed to achieve privacy and security of transactions, while the latter are self-executing and therefore bypass human involvement and judgment. These developments have facilitated the rise of decentralization, in particular the rise of DAOs.

     

    Dr Godwin defined DAOs as organisations which are governed by artificial intelligence in the form of smart contracts and use blockchain technology to record transactions and interactions with and between its members. Such organisations are decentralized as they remove the need for centralized governance by humans in the form of boards of directors and executive managers. Accordingly, trust in humans (as present in traditional corporate forms) is replaced by increased trust in technology. While this seems to do away with many of the traditional agency problems present in current corporate forms, it raises two important questions for consideration: (a) how DAOs should be characterized from a legal perspective, and (b) how DAOs should be regulated.

    Significant Milestones in the Development of DAOs

    Following Dr Godwin’s exposition of the backdrop upon which DAOs have emerged, Mr Saw Tiong Tjin, an Australian-qualified lawyer and an early mover in Ethereum, provided a deeper insight into decentralized technology and the developments over the last five years. Building upon Dr Godwin’s definition of DAOs, Mr Saw explained that DAOs are usually decentralized applications (dApps) which are built upon Layer One Protocols, which are blockchains that maintain their own consensus (such as Ethereum and Bitcoin). In sum, Mr Saw explained that DAOs are essentially like Telegram (or WhatsApp) group chats, except that the members are able to vote on decisions which these DAOs make, and the mechanism for voting is determined by the underlying smart contract.

    Mr Saw then highlighted the various milestones involving DAOs in the last five years:

    (a)  The hacking of “The DAO”, a DAO built on the Ethereum consensus, less than three months after the launch of Ethereum in 2016 where $60m was stolen. This demonstrated a potential issue faced by DAOs.

    (b) The launch of the Moloch DAO in 2019. This project aimed to create a Minimum Viable DAO, which introduced functions such as the post-vote grace periods and the rage-quit mechanism which allowed members to take their funds and exit the DAO.

    (c)  The demonstrated flexibility of DAOs to carry out a range of purposes, from acquiring funding for various projects (MetaCartel DAO) to the processing of relatively mundane organizational tasks (OrochiDAO) to innovative financial functions (MakerDAO).

    The Regulatory Perspective on DAOs

    Providing a regulatory perspective (on an entirely exploratory basis and not in any way representing the views of ACRA), Mr Leong Weng Tat, the Chief Legal Officer of ACRA, named three broad areas worthy of attention. The first is the growth of blockchain – while the technology was initially associated mainly with virtual currencies, today it has expanded to include tokens which provide its holders with various rights, such as voting and equity tokens. This may mean that legislation targeted at traditional corporate forms, such as the Companies Act, will require updating to accommodate these newer entities.

    The second area concerns appropriate regulatory responses. Mr Leong noted that adapting our regulations in traditional areas of concerns such as anti-money laundering, remain robust, IT governance will remain important, not least because hacks on newer entities such as DAOs are not infrequent. To this end, a possible approach may be to take reference from legislation across various jurisdictions dealing with areas, such as the regulation of autonomous vehicles, facing similar issues.

    The third area of interest focuses on the trends and developments in Singapore. Given that Singapore has embarked on its Smart Nation initiative underpinned by digital society, the trend is that the nation will move towards the path of digitalisation. This means that the accompanying regulatory developments will also be in that direction. As such, there will be the need for a balance to be struck between fostering innovation and ensuring regulatory protection.

    Decentralisation, DAOs, and its Legal Issues

    Ms Lock Yin Mei, a partner at Allen & Overy, shared her insights on the rise of decentralisation and the challenges which accompany it. She noted that decentralised entities such as DAOs have become attractive for several reasons, such as, inter alia, the increase in efficiency and the reduction in regulatory burdens, the provision of participants to have more say and control, and the potential to avoid the friction present in traditional organisations.

    Yet, at this stage of its development, decentralisation is not without its issues. These cover the following aspects:

    (a)  Governance – DAOs enjoy operational autonomy based on predetermined procedures that cannot be easily switched off. This raises the question of whether node users forming part of the consensus (voters) should incur liability for the actions of their nodes (votes). In addition, unlike traditional corporate frameworks, there are no mechanisms such as fiduciary duties to keep the relevant actors in check.

    (b) Regulation – it is still unclear how existing regulatory frameworks apply to DAOs and smart contracts. For instance, should the code underlying a smart contract be taken to capture parties’ intentions completely, or should reference to material beyond the smart contract be allowed? Would smart contracts allow for modification, amendment, or termination? These questions remain unanswered.

    (c)  Risk allocation – the question of risk allocation in the event of technical issues such as programming errors, system failures, and hacks also needs to be resolved. Moreover, given the decentralised nature of the platform, the question of governing law and the appropriate forum for dispute resolution in smart contracts becomes an important yet difficult issue.

    (d) Accountability – this concerns the question of which parties should be held liable in the event of exploitation or hacks on the DAOs. While the deterministic coding of DAOs suggest that liability should be attributed to those who create and run the arrangement, liability may not be easily enforced given the number of people involved and how broadly they are dispersed. The complex network of dependencies makes the identification of principal actors, and thus the assessment of liability, difficult.

    Ms Lock then examined how other jurisdictions have approached DAOs. Her analysis covered Malta (which regulates DAOs without giving it legal personality), the US states of Vermont and Wyoming (which allow DAOs to register as blockchain-based limited liability companies), and Delaware (which allows a company to be administered by a distributed electronic network or database, effectively allowing for DAOs to be incorporated). In her view, granting DAOs legal protection will bring transparency to the process of decentralisation which has hitherto been largely opaque and confusing, enable new forms of business, and produce efficient regulatory frameworks.

    The Principles Guiding Australia’s Developments

    To round off the panel discussion, Ms Urszula McCormack, a partner at King & Wood Mallesons, discussed developments in Australia targeted at supporting technological innovation while balancing the need for a safe, robust, and competitive environment. She identified several major trends that have framed the debate in Australia, namely the primacy of anti-money laundering efforts, the growing demand of consumers for privacy, the rise of technology in addressing compliance hurdles, and the emergence of human rights issues in technology. Against this backdrop, Ms McCormack suggested two regulatory approaches. The first is the risk-based approach, where the relevant activities are identified, the assessed risks are surfaced, control measures are developed, and the residual risks managed. The second is the principles-based approach, where jurisdictions begin with general principles and develop them into specific standards based on a greater understanding of the risks and measures available. Despite the utility of these macro approaches, the formulation of regulations has proved challenging, not least because there are degrees of automation and decentralisation, which means that various distinctions may need to be made with regard to regulatory oversight. Despite these challenges, one can take comfort in the fact that existing tools (legislation, regulations, and legal principles) are able to support policy measures and regulation.

    Conclusion: DAO – Thou shalt not fear?

    DAOs provide a pertinent example of how technology has enabled the creation of new organisational forms which will require accompanying regulatory frameworks that facilitate their development while ameliorating their threats. To this end, the webinar examined the technological and legal backdrop, highlighted the key challenges, and provided useful  suggestions for Singapore as well as other jurisdictions. It suggests there are good reasons to be  optimistic that the legal industry will, as Phang JA put it, grapple fearlessly with the relentless march of technology and its impact on the law.

     

    * This blog entry may be cited as Samuel Chan, “Event Note: Digitalisation and Decentralisation: The Future of Corporations”  (21 October 2021) (http://www.singaporelawblog.sg/blog/article/273)

    ** A PDF version of this entry may be downloaded here

     

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