Cryptocurrency has made headlines in the most unlikely of ways during the war between Russia and Ukraine. Whether the push by US lawmakers to enact a law to penalize foreign crypto companies doing business with sanctioned Russian entities or Ukraine receiving money through cryptocurrencies, one such way is through decentralized autonomous organizations or DAOs.
DAOs, like cryptocurrencies, are powered by blockchain technology. Raj Kapoor, strategic advisor, equiDEI, explains DAOs in one sentence: “DAOs are an internet community with a shared bank account where the people use the Ethereum wallet.”
According to the Ethereum website, the smart contract defines the community rules of a DAO and no community member can change it except by voting.
DAOs can be used for a variety of purposes, but are prominently used for charitable purposes and raising capital – the former being the case during the ongoing war.
UkraineDAO, a special initiative by the founder of the music group Pussy Riot, Nadezhda Tolokonnikova, has raised more than $6 million by selling Non-Fungible Tokens (NFTs) of the Ukrainian flag. According to the official website, all proceeds from the sale will go to ‘Come Back Alive’, a non-profit organization that helps the Ukrainian military.
“The case of the Ukrainian DAO shows that a decentralized structure can be quickly and cheaply set up and engaged with a community around issues of global concern,” said crypto expert Anndy Lian.
The UkraineDAO project, Lian notes, is indicative of how DAOs are allowing charities to bypass bureaucratic delays and put money in the pockets of those in need. “DAOs are more formal means of channeling funds and with less cost in terms of money transfer fees,” he adds.
DAOs and its future
While the war between Russia and Ukraine has put the spotlight on DAO – and crypto assets in general – this isn’t the first time a DAO has raised funds for whatever reason. For example, in November 2021, ConstitutionDAO hoped to raise funds through a DAO to purchase a copy of the U.S. Constitution.
“A DAO is a great way to boost the population during a war – an alternative form of financing. Russia and Ukraine have the opportunity to see how DAOs work, understand their loopholes and improve them. This war can be a step toward DAO’s adoption,” Kapoor says.
However, there are concerns about the potential use of DAOs to circumvent global sanctions. But Lian says crypto transactions are not anonymous and can be traced through a public-private partnership. Thus, he says, any illegal funneling of funds can be curbed.
There is also the bigger problem of DAOs not having a consistent regulatory framework. Crypto expert Lian supports a global DAO framework for greater sustainability. “There should be leadership at the international level, such as through the UN, but also by individual nation-states, if DAOs are to be sustainable,” he says.
DAOs in India?
In India, DAOs are likely to add a new dimension to the financial sector. “India finds the role of autonomous organizations to be cost-effective and helpful in making business easier. They can positively impact business outcomes,” said crypto veteran Kapoor. He also adds that DAOs don’t need cryptocurrencies, arguing that DAOs use blockchain technology that can also be used to create a recruitment portal or ride-sharing app.
The issue of regulating DAOs and other crypto-related products is the elephant in the room that has not yet been addressed in India.
Kapoor believes that the government will eventually be open to adopting DAOs if it sees the benefits. India is concerned about the misuse of crypto assets for terrorist financing and money laundering. Kapoor says a regulatory framework, which he believes will come once DAOs are brought under a legal mechanism, will control abuses.
But the fine print of such a regulation will be paramount. Kapoor explains why: “DAOs eliminate the need for a centralized authority. Regulating DAOs raises the issue of legal identity. Forcing DAOs to conform to an existing corporate structure can negate their decentralized aspect.”
While origin and compliance can still be important elements of regulation, it will be difficult to bring ‘smart contracts’ under a framework as changes cannot be made once they are made and this can be a problem if contractual conditions change, he notes.
Kishan Srivastava, co-founder of SDLC Corp, a crypto development and marketing company, argues that regulations should apply the KYT (know your transactions) mechanism to counter money laundering and terrorist financing through DAOs. “The KYT mechanism will focus on transaction behavior rather than the identity of the users. This can help not only monitor the real-time behavior of the transactions, but also ensure user privacy,” he says.