On October 23rd 2019, Mark Zuckerberg of Facebook testified before Congress. It was a six-hour-long ordeal of pre-written statements and poorly formulated questions on one side and (less than usual) expressionless testimony on the other. The hearing was not supposed to be only about Libra, Facebook’s cryptocurrency project. The investigative committee was interested in several aspects of Facebook’s business, from its decision not to fact check political ads to its role in enabling genocide over Rohindas. Even so, questions about Libra dominated the hearing. The members of Congress asked harsh questions, listed Facebook’s misdeeds, and even raised their voice at the young Zuckerberg. But what the hearing demonstrated is how unprepared Congress is to deal with projects like Libra, and blockchain technology in general.

What was lost among the platitudes is the fact that Libra is, in essence, a value transfer protocol. Just like internet protocols such as HTTP and FTP, blockchain can one day become as essential to the economy as the internet is today. Allowing any one company (or group of companies) to build such a value transfer protocol could give Facebook and its partners the possibility to privatize the pipelines of the global economy.

What did catch the imagination of Congress is the (crypto)currency aspect of the Libra blockchain. However, the digital currency is only one of the applications of blockchain technology and not its raison d‘être, nor even its core capability. The purpose of a blockchain as a protocol, including Libra, is to be a platform for building and developing new forms of digital assets, peer-to-peer transactions, and decentralized applications, akin to the Ethereum blockchain and many other blockchains that came after. If Facebook was to operate and maintain such a platform, it could soon dominate what many call “the future of the internet.” It remains unclear whether anyone on the committee gave this possibility any thought at all.

Republicans on the committee praised Zuckerberg as an innovator. Be it as it may, the real innovation behind Libra appears to be not technological, but rather organizational and political. By initiating the creation of the Libra association in Switzerland, Facebook is effectively giving Libra a way to come to life with or without Facebook’s direct involvement. Zuckerberg made it clear that he does not intend to move forward with Libra without the required regulatory approval from the US government. Still, he also stressed that he couldn’t speak for the rest of the members of the association. Lacking a single point of failure (and control) is precisely the power of decentralized systems, and Libra is already taking advantage of such power in order to lessen the influence of governmental regulation.

Libra is also a masterful political maneuver. The reiterated fears, by Zuckerberg and other, mostly Republican members of the committee, of the US losing the technological and financial supremacy to China would make even the staunched sinophile afraid. From trade war to technological competition, the relationship between the US and China is arguably the topic of the century, and no one should remain deaf to it. It is a powerful driver in Washington as well as in Beijing. But China’s intentions behind the recent announcements by the central bank or their president and their eventual impact are still poorly understood. The “Libra as the antidote” argument could end up favoring a particular type of arm wrestling, which might ultimately be harmful to the US economy, regardless of who the winner is. [1]

Motivation and intent behind Libra — the 1.7 unbanked billions

The 1.7 billion people who lack access to banking and financial systems seem to be front and center of Libra’s PR strategy. Drawing from Zuckerberg’s testimony to the talks given by Libra’s Kevin Veil and Calibra’s Cristian Catalini one week after the hearing, it appears that the driving force behind Libra is the need to help the poorest third of the world’s population. As noble of an objective as it sounds, upon closer examination such a lofty goal loses some of its charm.

The 1.7 billion number is based on the World Bank’s Global Findex Report from 2017. 400 million of them are located in China and India, two countries that are either building their own version of Libra (e.g. China) or have outright said they will not allow Libra to operate in their country (e.g. India). It is safe to assume that other countries will follow suit and — like Germany and France — ban or limit Libra through regulation. In light of this, the goal of banking these 1.7 billion people starts to look more like a moniker than a real goal.

In contrast to Libra’s focus on the poor, Facebook’s Q4 2018 earnings report tells a different story. In Q4 of 2018, the company generated $16.9B in revenue, coming mostly from the US or Canada ($8.43B) and Europe ($4.15B). Even revenues from the APAC region are coming from well-off countries with a smaller unbanked population. Given Libra’s potential impact on the cryptocurrency and blockchain ecosystem, it is astounding that no one is debating what Libra means for Facebook’s key demographic: rich, (mostly) western users.

To what extent is it realistic that Libra will actually contribute to banking the unbanked? And what is a realistic portion of the unbanked population that Libra will actually be able to empower and by when? Which strategies have been put in place to achieve those goals? These are all questions Congress should be asking the Libra team.

One can’t blame the committee for not being prepared to ask better questions. Blockchain technology is a notoriously difficult technology to wrap one’s head around, and most members of the committee have their attention divided. That is why the COALA team is putting out a series of articles that will debate various aspects of the Libra project with hopes of contributing to the much needed public debate.

For regular updates, follow COALA on Medium and on Twitter.

Libra was originally published in COALA on Medium, where people are continuing the conversation by highlighting and responding to this story.

DAOs are already a reality.

Since the first proto-versions appeared back in 2014 and later on the Ethereum blockchain in 2015, there have been hundreds of attempts to establish specific types of networked organisations known as DAOs, whose operations are distributed across the nodes of a blockchain network, and whose governance is defined or, more generally, administered by the code deployed on that network. However, as things stand right now, DAOs cannot legally own assets, enter into contracts, sue and be sued, and collaborators may face unknown and unlimited liability. For those building DAOs aimed at interacting with the off-chain world, this poses a major problem.

The goal of this model law is to assist governments in crafting their own DAO laws, so as to recognize full or partial legal personality to DAOs. The objective is to endow them with specific legal rights — and obligations — without requiring them to register or conform to traditional corporate law rules, so long as they satisfy the relevant legal provisions through technological means (e.g., “technological guarantees” afforded by blockchain infrastructure). Those technological means should provide legal protections equivalent to those underpinning traditional corporate legal forms, while taking account of the new opportunities of blockchain technology. At its core, this model law maps the various policy goals underpinning traditional corporate law rules, with a series of technological guarantees that can be regarded as “functional equivalents” to those rules.

Current limitations to mainstream adoption of DAOs

Today, the most successful DAOs do not interface with our legal systems. These are funding-oriented DAOs, like MolochDAO, MetacartelDAO, TrojanDAO, or YangDAO. Most of these DAOs’ transactions are carried almost entirely on-chain, and do not therefore require direct interactions with the legal system or with regulated entities in the normal course of their operations. In many cases, however, the regulatory framework of a particular jurisdiction requires them to comply with specific rules or sanctions, regardless of whether these rules have been codified directly into the code governing these DAOs or recognised by its participants.

The full potential of DAOs will, therefore, only be realised once they can safely engage in both on-chain and off-chain interactions, without the current legal uncertainties concerning their potential liabilities, rights and responsibilities. Yet, currently, given that DAOs lack both legal personality and legal capacity, they cannot create legally enforceable contracts, own property, benefit from limited liability, sue and be sued, or otherwise interface with the legal system. As a result, legal redress against a DAO can only be sought from third-parties found to be somehow related to the DAO.

From the perspective of the legal system, a DAO only exists through its constituent parts, e.g., the natural or legal persons participating in the DAO (such as its makers, members, enablers, or even participants, including external third party service providers).

Today, people transacting with DAOs often do so without appreciating the legal risks and potential liability attached to those transactions. In many jurisdictions, a DAO may be characterized as a general partnership or other form of unincorporated association, where each participant — regardless of the type or scope of participation — may be jointly and severally liable for the DAO’s actions. Depending on the jurisdiction, and the arrangements among participants and third parties, people participating in a DAO might thus be held liable for the actions of other participants acting on behalf of the DAO.

The risk of legal liability is especially important to developers. As a general rule, developers are not considered liable for unforeseeable damages caused by a software bug (unless they intentionally produced malicious code). In the case of a DAO, it may be difficult to pinpoint who should be responsible for any harm it might cause. If the creators, developers or contributors are not readily identifiable, any identifiable person may — for lack of a better target — be regarded as the closest available person to hold to account, and consequently run the risk of being prosecuted. This is an especially problematic issue for open, decentralised infrastructure projects that necessarily rely on the contribution of a global community of developers to create, de-bug and maintain these software systems.

Moreover, once deployed on a blockchain, a DAO may keep operating as long as the blockchain is running, independently of its original creators. Hence, to the extent that the assets of a DAO cannot be seized by a third-party, those who have been wronged by the DAO may have little recourse within our current legal systems.

Accordingly, unless they can be bestowed with the same affordances and constraints, and with the same degree of protection as traditional corporate structures, DAOs are unlikely to be adopted as an organisational structure outside of niche crypto-communities and exist solely as a parallel but isolated alternative system.

The benefits of legal reform

Existing laws were not designed with DAOs in mind. Current legal frameworks are designed around actors and stakeholders who are readily identifiable and operate within a territorially defined jurisdiction. Decentralized blockchain-based systems, on the other hand, are powered by global, permissionless participation. For DAOs to flourish, scale and actually enjoy the legal protections afforded by the legal system, legal reform is necessary. A legal framework providing legal personality and legal capacity to DAOs could incentivize the creation of “legally compliant” DAOs, designed to meet the criteria established by the legal system.

Such a legal framework would need to articulate ways in which technological guarantees conform to the legal requirements of public order — obviating the need to impose anachronistic regulations that cannot easily be enforced within these decentralized and transnational technological structures. Ultimately, this would facilitate the establishment of contractual relationships between DAOs and third-party service providers that would qualify as enforceable contracts under the law. This would support more collaboration between traditional institutions and DAOs, providing legal certainty for DAO participants and better redress for consumers, and potentially even make it possible for a government to properly tax DAOs under certain circumstances.

This work cannot be successfully achieved by regulators alone. The creation of a viable DAO model law requires a bottom-up, community-driven approach informed both by the expertise of legal scholars and policymakers, and by the experience of people working on the ground and interacting with DAOs on a daily basis. The DAO model law requires constant and recurrent interactions between lawyers and technologists, in order to successfully map the policy goals underpinning traditional corporate law rules, with technological guarantees that act as “functional equivalents” to those rules, in the ever-evolving technical landscape of blockchain-based systems. It is our hope that we will be able to engage a broad audience of people and diverse stakeholders interested in participating in this collaborative endeavor. In the following weeks and months, we will set out the issues to be addressed and solutions proposed in more detail, in a series of blog posts. Please do not hesitate to reach out to us at info@coala.global if you would like to learn more about the work we are doing and/or contribute to the DAO Model Law project.

Click here to sign up for our newsletter

The DAO Model Law was originally published in COALA on Medium, where people are continuing the conversation by highlighting and responding to this story.