Cryptocurrency has grabbed global headlines in the unlikeliest ways during the Russia-Ukraine war. Whether the US lawmakers’ urge to enact a law to sanction foreign crypto firms doing business with sanctioned Russian entities or Ukraine receiving funds through cryptocurrencies, one such way has been via Decentralised Autonomous Organisations or DAOs.
DAOs, like cryptocurrencies, are powered by blockchain technology. Raj Kapoor, strategic advisor, equiDEI, explains DAOs in a single line: “DAOs are an internet community with a shared bank account where the people use the Ethereum wallet.”
As per the Ethereum website, the smart contract defines the community rules of a DAO and no community member can change it except by a vote.
DAOs can be used for several purposes but are prominently applied for charities and raising capital – the former being the case during the ongoing war.
UkraineDAO, a special initiative of musical group Pussy Riot’s founder Nadezhda Tolokonnikova, has raised over $6 million by selling Non-Fungible Tokens (NFTs) of the Ukrainian flag. According to its official website, all proceeds from the sale will go to ‘Come Back Alive’, a non-profit organisation, which is helping the Ukrainian military.
“The case of Ukraine DAO shows that a decentralized structure can be spun up quickly and cheaply and engage with a community around issues of global concern,” says noted crypto expert Anndy Lian.
The UkraineDAO project, Lian observes, is an indication of how DAOs are allowing charities to bypass bureaucratic delays and direct funds into the pockets of those in need. “DAOs are more formal means to channel funds and with less cost in terms of money transfer fees,” he adds.
DAOs And Its future
While the Russia-Ukraine war has put the spotlight on DAO – and crypto assets in general, this isn’t the first time that a DAO has raised funds for any cause. For instance, in November 2021, ConstitutionDAO hoped to raise funds through a DAO to purchase a copy of the US Constitution.
“A DAO is a great way of incentivising the population during a war – an alternate form of finance. Russia and Ukraine have the opportunity to see how DAOs work, understand their loopholes and make them better. This war can be a step towards DAO’s adoption,” says Kapoor.
However, there is a worry about the possible use of DAOs to circumvent global sanctions. But Lian says that crypto transactions are not anonymous and can be traced via a public-private partnership. Thus, he says, any illegal funnelling of funds can be kept in check.
There is also the larger issue of DAOs lacking a consistent regulatory framework. Crypto expert Lian backs a global DAO framework for greater sustainability. “A lead would need to be taken at an international level, such as through the UN, as well as by individual nation-states if DAOs is to prove sustainable,” he says.
DAOs In India?
In India, DAOs are likely to add another dimension to the financial sector. “India is finding the role of autonomous organisations as cost-efficient and helpful in the ease of business. They can positively impact the bottom line of companies,” says crypto veteran Kapoor. He also adds that DAOs don’t need cryptocurrencies, arguing that DAOs use blockchain technology which can also be used for creating a recruitment portal or ride-sharing app.
The issue of regulating DAOs and other crypto-related products is the elephant in the room not yet addressed in India.
Kapoor feels that the government will eventually be open to the adoption of DAOs if it sees the benefits. India has been concerned about crypto assets being misused for terror funding and money laundering. Kapoor says that a regulatory framework, which he believes will come once DAOs are brought under some legal mechanism, will keep a check on any misuse.
But the fine print of such a regulation will be of paramount importance. Kapoor explains why: “DAOs eliminate the need for a central authority. Regulating DAOs present the issue of legal identity. Forcing DAOs to conform with an existing business structure may negate their decentralised aspect.”
While provenance and compliance can still be key elements of regulations, it will be difficult to bring ‘smart contracts’ under a framework since no changes can be made after they are created and this could be an issue if contractual circumstances change, he notes.
Kishan Srivastava, Co-founder, SDLC Corp, a crypto development and marketing firm, argues that regulations must apply KYT (know your transactions) mechanism to counter money laundering and terror financing through DAOs. “KYT mechanism will focus on transaction behaviour rather than the users’ identity. This can help not only monitor the real-time behaviour of the transactions but also ensure the user privacy,” he says.