DAO regulation in Australia: Issues and solutions, Part 1

Certain laws need to be passed before DAOs can be properly regulated, which the Australian government aims to achieve.

Lawmakers in Australia want to regulate decentralized autonomous organizations (DAOs). In this three-part series, Oleksii Konashevych discusses the risks of stifling the emerging phenomenon of DAOs and possible solutions.

On March 21, 2022, during Blockchain Week Australia, Australian Senator Andrew Bragg made a few interesting statements, one of which was about the intention of lawmakers to introduce regulations for decentralized autonomous organizations.

Per se, it is not new, as the Australian Senate Committee led by Senator Bragg recommended in October 2021 that decentralized autonomous organizations be brought under the fold of the Corporations Act, which provides standards for corporate governance and personalities.

Senator’s plan

So, what did Senator Andrew Bragg say?

“Decentralized Autonomous Organisations can replace Companies. It might be the most significant development since the first joint-stock companies floated on the Amsterdam Stock Exchange in 1602.”

He continued: “If that doesn’t make policymakers listen, perhaps this will. Given that DAOs are recognized as partnerships, not companies, they are not liable to pay company tax. Company tax accounted for 17.1% of total Commonwealth government revenue. Our reliance on company income tax is unsustainable.” Bragg added, “DAOs are an existential threat to the tax base and they must be recognized and regulated as a matter of urgency.”

On his website, you can find an extended version of the statement, where the senator shows some economic figures to support his conclusions.

At this point, I should clarify that the partners of a partnership do pay taxes but separately: Individuals pay income tax and companies in the partnership still pay the company tax, as would any other normal company.

Then the senator clarifies what aspects of the DAOs, exactly, the government plans to regulate, “Recognizing the fact that DAOs are self-regulating and transparent, with an in-built system for governance.”

He continued, “The Treasury will need to address these issues, leaving the field open for DAOs to continue to live up to their name. Any attempt to prescribe a code [would] be self-defeating.”

Related: Australian Senators pushing for country to become the next crypto hub

Issue

And it sounds not bad, doesn’t it?

Indeed, if properly implemented, all three objectives can be achieved: the consumers will be protected from malicious and unscrupulous businessmen, revenues will be duly taxed and at the same time, the emerging industry of DAOs will not be stifled.

And here is a snag. All DAO and fintech regulations we have seen in the world so far went down that bureaucratic path of relying on conventional approaches and methods. The red tape. The difference between them is just about the tightness of the noose.

The problem is that new approaches to regulating this industry are not discussed widely in society and among politicians. They are not on the agenda. But these concepts exist, and I spent five years of my academic research working on them.

Related: Decentralized autonomous organizations: Tax considerations

The risk is that because these new concepts are not raised, they are not on the agenda of politicians and bureaucrats, so when it comes to regulating, they will refer to the existing methods, to something that they know, and this is not good because they only know the conventional ways of regulating. But DAOs appeared as the response to obsolete approaches, excessive bureaucracy and red tape.

Read about replacing a company registry and the “Code is Law” paradigm in Parts 2 and 3.

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