Distributed Authority Will Assist the Function of Boards but it Does not Mean the End of Governance

While Commonwealth Bank’s inclusion of cryptoassets on its trading platforms made headlines, more profound is the organising idea behind those assets and what it could mean for institutional functions such as corporate governance.

The spine of cryptoassets such as Bitcoin, is the blockchain. It’s a distributed ledger technology which is self-verifying and self-measuring. It is essentially a very efficient, very fast, never-wrong rules machine, run from participating computers, nodes and networks, rather than from a centralised system. The participants decide the value and the uses of the asset, based on the ‘rules’ of the asset and the ‘rights’ of the participants.

The governance behind cryptoassets is decentralised and an extension of this theme emerged around 2016 with the first DAO (Decentralised Autonomous Organisation).

DAOs typically use distributed ledger technology and to date they have often been used in the context of fundraising for investment or community building initiatives. Members buy-in to the DAO by purchasing the relevant token and through the token obtain voting rights in relation to the subject matter of the DAO. For example, ‘Constitution DAO’ was formed last year to raise money for the acquisition of an original transcript of the US constitution. It issued tokens called PEOPLE, which participants acquired. Had they been successful in bidding for the transcript, the PEOPLE tokens would have given a proportionate vote on what the DAO should do with the purchased Constitution. Other DAOs have been established for investing in assets or pursuing other purposes and it's all facilitated through smart contracts and underpinned by a blockchain. A friend of one of the authors also recently invested in a DAO which acquired several Non-Fungible Tokens (NFTs) – the tokenholders were unable to agree whether to upsize the investments, substitute the investments or liquidate the investments so in the end the DAO defaulted to liquidating the investments. This sort of limitation is common in current setups.

Looked at in this light a DAO, through its smart contracts, essentially represents a company constitution and a virtual board of directors for an entity with a very specific purpose. So, there’s no reason why a DAO system cannot be used as a broader governance function for a company. A Board is supposed to make good decisions in favour of investors, set strategic direction and also provide oversight of executive management. These could be achieved through a DAO, if the configuration is sophisticated enough. There are questions as to the legal status of a DAO, but the legal system has adapted in the past, such as with the evolution of the original joint-stock companies. Indeed, as noted in our recent column, the law is rapidly developing in terms of what boards are required to focus on in their decision-making.

There are a number of arguments for governance to be automated, the first being its reduction of personality-based issues such as groupthink, Alpha-dominated decisions, information-hoarding and vested/captured interests. A DAO framework eliminates mistakes and doesn’t rely on the frailty of discretionary disclosures such as conflict of interest or related-party transactions. A DAO could make decisions in line with its specified purpose and applicable laws and regulations.

It may be that we never use DAO structures to do the work of corporate governance entirely, because it might be the case that certain duties of a fiduciary nature or which otherwise may not be capable of distillation into rules cannot be outsourced to a machine. However, it is conceivable that many of the rules-based functions of a board could be discharged on a blockchain system that doesn't make mistakes and can’t be influenced.

Perhaps we can use the blockchain to make decisions, but use human judgement and accountability for larger issues that are voted on? At least for the time being advances in technology will no doubt extend the possible applications.

For most boards, blockchain technology is already on the horizon, whether through cryptoasset investments or the soon-to-be introduced financial reporting platforms that run on the blockchain. The key will be how the technology is utilised. However, one thing is for certain: using a DAO to make accurate technical decisions will never replace the need for boards to use good judgement in their duties to shareholders and other stakeholders.


Jamie Ng is the Global Head of Ashurst Consulting division
Rob Hanley is the head of Ashurst Legal Governance Advisory