Blockchain technology allows for decentralized organizations run through smart contracts without centralized governance. This could transform business models by facilitating long-term financing through mechanisms like crowdfunding and new forms of cooperatives organized as decentralized autonomous organizations (DAOs). However, DAOs operate in a regulatory grey area without protections of traditional legal structures, and complex algorithms may be difficult to oversee, raising issues around accountability, fraud, and compliance with laws. Greater transparency and oversight of algorithmic decision making may be needed.

1. Blockchain – Consequences for
supervision and governance
SMART - Sustainable Market Actors For Responsible Trade
Jukka Mähönen• University of Oslo
29.05.2018
Twitter @UniOsloSMART #SMARTproject

2. SMART
analyses the regulatory complexity within which European market actors operate.
With a focus especially on international supply chains of products sold in Europe, the
aim is to find out what prevents and what promotes a shift towards sustainable
development.
SMART is funded by the
European Union

3. Structure
What is a blockchain?
Where it is used?
Where it can be used?
Decentralised autonomous organisations

4. Introduction
Blockchain - distributed ledger technology (DLT)
DLT: a decentralised transaction register distributed among
network participants, with transactions taking place directly
between end users
Blockchain one type of DLT
a digital system, based on the Internet and a network of computers
to share and continually reconcile the shared version of truth

5. Blockchain
represents a revolutionary system of tracking and
maintaining the integrity of data safe from tampering
by other individuals or centralized governance mechanisms
governments, banks and corporations
a ‘trustless network’ as the parties can transact even though
they do not trust each other
no trusted third party or intermediary that approves or denies transactions as it
is in the centralized governance models

6. In blockchain
devices, in many cases millions, in the network
running complex algorithms
responsible for validating transactions and uploading new
blocks to the chain which implements a public ledger

7. Introduction
Lots of talk of blockchain – especially from cryptocurrency
point of view (»Bitcoin»)
However, the less exotic use of blockchain is in ordinary
business – how to make value chains more efficient?
Logistics and transport
Energy production
«Internet of Things» (IoT)

8. Introduction
Generally, very positive atmosphere for blockhain in Europe
European Commission (FinTech Action Plan, 2018)
European Parliament
EU Blockchain Observatory & Forum (just starting)
ESMA
New threat: General Data Protection Regulation (GDPR)
Conflict with the non-tamper nature of blockchain

9. Regulatory philosophy in Europe:
Digital Single Market
“It is not smart to regulate the technology per se, but rather
its uses and the sectors that adopt this technology in their
business models. Consumer protection and investor
protection come first.”
Applying the blockchain model to energy use, supply chains and governance
would benefit businesses and citizens
But uses other than for crypto-currencies need to be promoted
Getting the rules right could make the EU a global leader

10. Digital Single Market
On the other hand, the Commission FinTech Action Plan
(2018)
Standardization of the technology itself?

11. Use of blockchain / DLT
Norges Bank (2018)
gold and diamond sales, loan syndication, trade financing, securities trading and
settlement infrastructure, international payments, know-your-customer
systems and other processing and sharing of information
payment systems for the general public probably do not represent the simplest
application of DLT
greatest potential in settlement systems, particularly in conjunction with other
financial infrastructure (securities settlement, currency settlement) involving
central bank settlement

12. Use of blockchain / DLT
The Bank of England’s future settlement system is to be
compatible with potential DLT-based securities settlement
systems (Carney 2018)
UK Cryptoassets Taskforce (HM Treasusry, Financial Conduct Authority, Bank
of England)
Blockchain-based decentralized securities exchanges
(Singapore?)
Monetary Authority of Sinagapore: an attempt to ease market access for small-
scale exchange platforms

13. Crucial spots:
Blockchain platforms
Consumer protection
Platform cooperatives (see below)
Public use of blockchain

14. Public use of blockchain
Land registries (India)
E-citizenry (Estonia)
Reporting and assurance (RegTech) (Big4)
Digital invoicing to fight tax evasion (China)
Initial coin offerings (ICOs) (Russia)
Central bank digital currencies? (CBDC)

15. Public use of blockchain
European Financial Transparency Gateway?
EU Public Blockchain initiative? (FinTech Action Plan: COM will consult
Q2/2018 publicly on further digitisation of regulated information about
companies listed on EU regulated markets, including the possible
implementation of a EFTG based on DLT

16. Hotspots
Unregistered securities trading
Are blockhain «tokens» «securities»? (MAS of Singapore)
Two sides: allowing DLT securities exchange platforms as long as they are
under supervision
Tax on Cryptocurrency Trades? (India)

17. Lot is happening but what does
this mean for business models?
Problems of mainstream business models
Lack of long-term financing
Bank financing hard without collaterals, especially after financial crisis
Short-termism of venture capitalists and private equity providers (in hurry to
cash out)
Problems of listing (IPOs)

18. Business models
Intermediaries short term demands
Institutional investors as pension funds and hedge funds
Intermediaries v. ultimate beneficiaries
International financial accounting standards leading to short-termism
(mark-to-market valuation)
Big4

19. How to tackle problems?
New contract-based business forms
Stay private (Silicon Valley start-ups)
Crowdfunding
Neo-cooperatives
Problems in tackling problems

20. Still dependant on institutions
Institutional private equity investors
Start-up scene dominated by a clique of venture capitalists with privileged
access to equity
Platform providers
Banks
Financial institutions (eg payment service providers)
Tech giants (Alphabet, Amazon, Facebook) New technology:
In many new financing and business solutions DLT or blockchain is a crucial tool

21. Smart contracts the key?
During the last few years, self-enforcing digital smart
contracts organised with blockchain technology have created
new possibilities for organizing businesses
A radical interpretation of smart contracts would reduce the contract to the code,
effectively declaring the code as the law itself: self-contained, self-performed and
self-enforced
Smart contracts are used in value chains, usually through IoT, automatically
confirm transactions
As such, blockchains an alternative to ownership ledgers based on classical
fifteenth century based double-entry bookkeeping

22. Smart contracts
Blockchain can be called a ‘triple-entry accounting’: all
accounting entries involving outside parties are
cryptographically sealed by a third entry, the chain of
validated prior transactions
Blockchains offer advantages in cost, speed, and data integrity compared with
classical methods of proving ownership
used for recording ownership rights to variety of endowments, from real estate
to financial instruments, vehicles and works of art as well as public records as
birth certificates, drives licenses and university degrees

23. Decentralised autonomous
organisations
In the last phase, a firm itself is decentralized from the
traditional public and private governance system
The firm run through a network of blockchain smart contracts as a desentralized
autonomous organisation (DAO) or decentralized autonomous corporation
(DAC)
as programs including the required rules and decision-making apparatus for an
organization eliminates
the need for public (as law) or private (as legal personality)
institutional and human (as board and management) governing roles

24. Decentralised autonomous
organisations
agency costs from incomplete contracting that are created through agency
relationships between investors of different capitals, boards and managers
mimics a traditional organisation but replaces law and
humans with its respective technology and code
The Code / architecture in the regulatory ecology model (Lessig, van der
Velden)
Replacing law, market, social norms

25. Why blockchain, smart contracts
and DAOs?
Natural tools to self-govern and self-enforce value networks
Especially complex circular economy business models
Lack of capital one of the most important barriers to the adoption of
sustainable and circular economy

26. Why blockchains?
Shifting from a linear to a circular business model requires
novel innovations in
distribution planning
inventory management
production planning
management of reverse logistics networks
High upfront costs and long payback period

27. Why blockchains?
Implementing a circular economy business model also
demands
continuous monitoring and improvement of the products’ lifecycle,
resources must be allocated to keep all stakeholders committed
Blockchain technology might give tools to solve these
problems

28. Blockchain in finance
Blockchain-based cooperativism can give ordinary people a
possibility to invest start-ups directly
Two examples
Crowdfunding
Neo-cooperatives

29. Crowdfunding
Blockchain enhances crowdfunding – enabling long-term
financing
No need for platform intermediaries as trusted third parties
Banks and payment service providers
Especially developing economies
Direct customer support into the business model
Blockchain based DAOs give a genuine new possibility to build a smart P2P
contract between the participants

30. Crowdfunding
Blockchain can be used to store information without relying
on any centralized server or intermediary but relying instead
on the contribution of every peer in the network in order to
deploy a fully decentralized database, whose security and
integrity is ensured by cryptographic algorithms
Blockchain technologies eliminate the need for
intermediaries, by enabling the establishment of a genuinely
decentralised crowdfunding operating autonomously on top
of a P2P network

31. Crowdfunding
In a blockchain based crowdfunding platform all relevant
services and corresponding transactions are stored in the
blockchain

32. Neo-cooperatives
Next step from crowdfunding is to institutionalize it but not
necessarily to a traditional cooperative enterprise but as a
decentralised cooperative organization
Smart contracts including ethical algorithms of sustainability can give new
possibilities to cooperativism and self-governance, difficult to incorporate into
existing limited liability entities
A smart contract governing the whole value chain, connecting it to one network
through IoT, might for instance limit or prevent purchases from a cooperative
store if a member’s carbon footprint grows too big or if there are too many new
purchases without circulation of previous purchases

33. Neo-cooperatives
Cooperative membership and share ownership itself can be
designed to be fluid and automatic
depending on factors such as contributing to use of shared property or
purchases from a cooperative based agri-food industry or a shared autonomous
vehicle pool
If a member does not carry her responsibilities or do not fulfil
set rankings or optimal choices,
measured according to factors in smart contract,
membership rights could be revoked automatically, or
membership terminated without any human interaction through a predefined
smart contract

34. DAOs from regulatory
prespective
DAOs (like many blockchain-based initiatives)
exist in a regulatory grey zone that may not offer liability, protection or
accountability guarantees
particularly when they are not explicitly grounded in existing legal systems
There is also legal concern over equity offerings
may place DAO- «companies» within the existing securities market requiring
registration and conformity with a number of rules and obligations

35. DAOs from regulatory
perspective
By operating outside of a regulatory framework
blockchain-based organisations that are not incorporated or legally recognised
may be at risk of investment fraud and malicious hacks
their members could be exposed to liabilities as partners
What is the answer?

36. DAOs from regulatory
perspective
Some have called for greater oversight and transparency
in algorithmic decision-making and interactive modelling
The complexity of advanced algorithms makes it difficult
even for developers to fully understand their governing rules, and to check
their legal compliance, for example with anti-discrimination and transparency
laws
Self-running and self-enforcing organisations could also challenge traditional
notions of legal personality, individual agency and responsibility.

37. DAOs from regulatory
perspective
Problems
DAOs could be programmed to trade in illicit goods or banned products
Even where anonymity is not guaranteed, the efficient, automatic and
distributed structure of the underlying blockchain could make it difficult for
regulatory bodies to enforce the law and shut operations down
Victims of crime at the hands of a DAO may also find it difficult to recover
damages, or to obtain an injunction against the malicious DAO, where the
capacity to engage such measures is not specifically encoded within its
structure

38. Click to add text

39. Thank you!
jukka.mahonen@jus.uio.no
Twitter: @jukkamahonen
SMART is funded by the European Union under the Horizon 2020 programme, grant agreement 693642. The contents of this
presentation are the sole responsibility of the SMART project and do not necessarily reflect the views of the European Union.