A proposal for a worldwide regulation of Cryptocurrencies, DAOs, and Taxation

Abstract

Blockchain technology is changing every sector of technological things and especially is changing how people and institutions are playing in finance and entrepreneurship. This new disruptive industry is possible, thanks to the Bitcoin Experiment.

When someone tries to regulate Crypto, has to understand why Bitcoin is legit and why before Bitcoin every currency test had failed for a single point of failure.

They developed a currency in which investors need to trust an entity for its value and existence. Bitcoin is legal based on all the features that make its network unstoppable and censorship-resistant without any point of failure.

The problem to solve in recent years is how to regulate this is industry based on the evolution of this technology and the difficulties for non-tech people about the understanding of the value behind it.

Trustable networks like BTC or ETH are opening new ways to finance and build technology. The state of art of innovation in the Blockchain industry is to rethink from scratch how our society grants values and to rebuild every cross-boarder interactions to be censorship resistant and without a single point of failure, designing economies that work in anonymity, without any need to trust a single person or an entity, but only math and code.

The US-based SEC is trying to regulate this field to secure US investors from scams and at the same time to reduce money laundering and illegal activities. But other countries are embracing these new technologies as safe for every kind of business, even “illicit” or “Just Speculative” activities.

A technology that could simplify boarder-less transactions, trust and accelerate innovation all over the world, is on a scenario where long-term focused innovators have difficulties to embrace it because of legal uncertainly.

This scenario is helping speculators and scammers in short-term profit, frustrating tech-based entrepreneurs that are working on this field to create real values and to change the world.

The main issue that the SEC wants to solve is to regulate the difference from custodian-based projects and projects with no need for a custodian or an entity to trust. Take, for example, the Tether, a custodian-based token.

Every Tether is set to $1 due to the trust to an entity that stores $1 for every Tether created. In this Case the SEC has to be sure that the Tether’s issuer company (incorporated in Hong Kong) has this money in its bank account, because if exchanges or the entity behind Tether don’t recognize the value of Tether = $1, investors will remain with nothing.

Projects like Maker DAO are exactly the opposite, because the value of the Stable Coin DAI is based on a complex math on top of the collateralization of ETH via smart contract, with no need for an entity to set the value of $1 for every DAI. The SEC, in fact, likes as crazy this kind of projects because they are totally censorship resistant.

The way the SEC is trying to regulate crypto-assets makes sense in order to put some barriers on speculators that are trying to create new centralized derivates using the buzzword “Tokens”, without giving investors the trust of being regulated as a bank.

The value of DAI is based on an innovative mathematical challenge, while the value of Tether is based on trust entities without any innovations and censorship-resistant security.

To solve this huge problem that is driving all the industry toward building illegal things, “but on the Blockchain”, this article proposes a tech-oriented worldwide standard for a global regulation, that simplifies entrepreneurship and secure investing.

To better understand the purposes, it is critical to define the following:

• Trustless Public Blockchain*: A Permissionless Blockchain network able to store Censorship-Resistant Transactions, protected by a Consensus Algorithm (POW,POS…), powered by Anonymous Miners/Validators and with a Decentralized Governance. Basically, an Unstoppable Network able to provide trust without trusting any entity or person.
• Federated Public Blockchain**: A Permissioned Blockchain Network with selected and knowledgeable number of Validators/Miners that provide security through a Shared Consensus. Basically, a Network able to provide trust, trusting selected entities or people.

This Proposal is divided in 3 main thread:

1. A simple way to define what is a trustable technology, without points of failure
2. A Standard for DAOs as a legal entity like a regular corporation
3. A worldwide taxation system without any point of failure, achieving global equality with the same financial standards

1. Crypto as a Censorship-Resistant entity

Crypto has to be illegal! Not every crypto I mean, but cryptos that are not censorship-resistant and unstoppable by design. If we think about how the industry started, this assumption makes perfect sense.

Before the Bitcoin experiment, building currencies was illegal, and that was a good thing! Bitcoin is legit, not because of deals with central banks, but due to its unstoppable nature.

So why are non-censorship resistant digital cryptocurrencies legal today?

If I create a new currency in my own database is a scam and the SEC will stop me from doing this, so why is it legal ad accepted to build one’s own currency in a non-censorship resistant network, like a Federated Blockchain**?

Both currencies mentioned before are controlled and manipulable by a restrict number of companies, so there is no difference in terms of trust.

For example:

If 100 companies create a Federated Blockchain** to run a Cryptocurrency, they are not anonymous. So, if you own that crypto, you trust these companies rather than the math, since they know each other and can easily create a cartel and reach the 51% of the consensus to manipulate transactions. At the end of the day, they could manipulate a coin the same way as centralized databases.






In terms of regulations, if these 100 companies use a Federated Blockchain to transact pieces of information, and they choose to trust each other, there is no legal problem (it is like trusting the Titanic as an unsinkable ship… it means they don’t hurt anyone but themselves). But, when they transact money, they have to secure customers in a regulated way, providing all the certifications that a bank has.

This proposal is about regulating this field the same way we regulate every other database.

If a cryptocurrency is considerable as a Trustless Public Blockchain*, this is a legit currency, not because it’s fancy, but because it’s unstoppable.

The challenge to regulate cryptocurrencies is about how and who has the rights to define what is decentralized and what is not.

There is a math-based way to easily define what is legit or not, using economic disincentives that can work, without having to choose the right technology in a centralized way.

For example,

if users make illicit activities on a centralized platform, legally the platform has to stop them. In legal terms, if the owner of the platform is able to censor users’ illicit activities, the platform has all the responsibility for regulators.

So in every kind of internet environment, when you host something, if you’re able to censor it, you’re responsible for what happens on it.

In a Trustless Public Blockchain*, anyone has the right to censor transactions. Manipulations can happen only if, for some reasons, someone reaches the 51% of consensus power, even if there are economic disincentives to do that.

The following is a new regulation able to create an legal disincentive to make 51% attacks:

If a Cryptocurrency has a single point of failure, so that a single entity or a collision of entities could manipulate it, they will have the legal responsibility for everything that happened in the manipulable blocks, even if they didn’t mean to manipulate transactions.

For example:

If a miner has the 51% of consensus during a block in which someone transacts 3 transactions on a Ponzi Scheme or some other illicit activities, the miner has the legal responsibility for those illicit activities.

This way of thinking can create a new economic disincentive to build and trust Federated Blockchains** and, also, to reach the 51% of power in Public Blockchains*.

2. A DAO Model as a recognized International Legal Corporation

During the ICO bubble of 2017, the entire industry tested a lot of different ways to understand and use Tokens (Crypto built via Smart Contracts and not usable to pay validators in the network).

The most common problem in crypto-based startups is how to embrace this technology without regulatory risks.

One of the most disruptive use case of the Blockchain technology is the concept of DAO (Decentralized Autonomous Organization, basically a series of voting rights based on smart contracts to rule an organization).

“DAO is the killer app of Ethereum” Andreas M. Antonopoulos.

The concept of DAO could be the main tool for innovators who are focused on building Decentralized Applications. In fact, they can build new amazing way of rethinking finance, social media and solving every cross boarder problem without trusting any entity, but math.

As mentioned before in the “Abstract”, DAOs is the decentralized way to build what STOs (Security Token Offering) aims to be, but without any entity to trust.

As well as Tether vs DAI, if you “Tokenize” your equity, those tokens are connected to real equities only if the company issuer recognizes it. That is why the SEC is making a lot of legal friction on it. In this case DAOs works like DAI in stable coins. If you own tokens of a DAO, you can vote or do actions directly without intermediaries via smart contract, so you don’t need to trust any entity, because the DAO rules are already written in the code, in terms of the actions that token holders can make.

This Trustless-based future is a step forward for our society and is growing like crazy, creating something like a new international state, with math based rules, free from institutions or lobbies.

The most impressive example of an application on top of a DAO is Maker DAO, one of the most disruptive project, father of DAIs Stable Coin, the basic layer for what we call the “DEFI Ecosystem”.

If we analyze the website https://defipulse.com/ that tracks the usage of Decentralized Finance (DEFI) apps, we can see on top of Ethereum a new Trustless Finance covering:

Stable Coins, like DAI (without needing any institution or FIAT custody, but collateralizing ETH) 

Loans, like Dharma, counpound or Nuo (Without needing any institution as a custodian or any security agency, but based on lateral collateralization using DAI) 

Insurance for decentralized loans, like Nexus Mutual (Without needing any institution as a custodian or any security agency) 

Decentralized Exchanges, like Kyber, IDEX or EtherDelta (Without needing any institution or custodian)

Banking, like InstaDapp (Without needing any institution or custodian)

and more…

At the time of writing, I watched this video from a Crypto-YouTuber called Chico Crypto, about the implications of DEFI applications:




DEFI is only one of the disruptive implications that DAOs in Blockchain technology will achieve.

DAOs could disrupt voting, decision making, social trust or fake news prediction: basically everything in which we need to outsource trust.

The Stable Coin DAI is a game changer for DAO-Based entrepreneurship all over the world. If founders are able to build a DAO, without any implications on the centralized world, countries can stop waisting tons of money in accountability and other security scrutinies. In fact, DAOs are a totally transparent way to make business by design, because every transaction that users make is public and not manipulable as well as every decision making event, as well as every fork or change of the DAO itself. DAOs are transparent to regulators anytime 24/7 in order to check the status and to trust it in every term possible.

In DAOs regulations terms, this article aims to propose a regulated standard code for DAOs, defining standardized functions. To achieve the scenario where founders can open a DAOs simply using these standards and automatically works like a legal incorporation of a recognized company. This is a new way to incentive founders with good and decentralized ideas that really want to do innovative businesses, helping them be transparent with a regulated and cheeper way to simplify every friction to do business.






For example,

if all the countries work together to build the standard code for DAOs, a founder could as easily as ever adapt some rules and transact its new DAO on the Main Net in ten minutes and at the cost of an ETH transaction. This way, regulators can defeat tons of wasted money to examine it with useless and complicated procedures designed for the 18th century.

So, the founder could find investors, manage the company expenses in DAI, or even build the smart contract for its Dapp, in a totally transparent way. After that, its customers will be able to transact smart contracts regulated by the DAO, without any opportunity of manipulation.

In this example, every decision making event is ruled by DAO’s Token Holders. For non scripted legal documentation, the DAO could generate NFTs (Non-Fungible Tokens) and DAO’s Token Holders can vote for their validity in a censorship resistant and transparent way.

DAOs could replace companies’ incorporation, defeating every single point of failure of the modern centralized system, that is wasting regulators and founders’ money.

3. Smart Contract based taxation: a worldwide standard for a new financial equality

How to tax DAO-Based entities is the last problem to solve…

Blockchain is the most globalized ecosystem ever made, without any geo-localization function, building its trust through anonymity. If countries will try to build different taxation standards, that will transform this idea in a huge fail.

In this case DAOs will use the best taxation possible, because they’re stateless by design: the state that will tax less, will achieve all DAOs.

This process is inevitable, because this kind of new International Corporations, as DAO, are totally censorship-resistant and unstoppable. If regulators don’t create an international standardized taxation system, they will simply loose DAOs’ tax until they will do it.

In the last century, we have built a financial structure for innovation, based on different regulations and different countries. In a globalization era, this way of regulating our world is creating a huge cultural and regulatory gap in fund raising ad innovation, excluding some countries, due to obsolete rules.

For instance,

if two companies compete with similar products, the best product will not win because they’re competing with different rules and this is not fare at all. It’s like a football game: two teams playing with different rules because they’re from different countries. In this case, the team with more favorable rules will always win by design, even if the other team has a better coach and better players.

The smarter way to tax DAOs in a decentralized, transparent and global scenario is setting a fixed tax for every commercial transaction in the DAO, where customers will pay that tax on the transaction via smart contract.

Another unaddressed question is how to manage the money from taxes. 
A solution could be building an international DAO where countries have voting powers on choosing how to split the money.

This way, there is no point of failure in taxation because every DAO will be not able to make any kind of fiscal evasion. At the same time, it will be easy for every State to track every DAOs’ transaction if for some reasons didn’t code this tax in their smart contracts.

Imagine how the world of entrepreneurship could become cheaper and open to everyone in the world with a new worldwide equality, achieving the “Holy Grail” of accountability.

This article is thought as a proposal to start a conversation including everyone. I hope more people will participate to build a solid solution, for a new smarter and equal world of Decentralized Entrepreneurship.