Emerging Tech Law Issue #8
An introduction to the DAO, U.S. sanctions Chinese quantum firms, researchers make gene-editing breakthrough.
Welcome to the eighth issue of Emerging Tech Law — a slightly irreverent view of regulatory developments (and other interesting stuff) relating to emerging technologies including AI, IoT, robotics, blockchain/crypto, 5G, artificial/virtual/extended reality (and the metaverse), biotech and quantum computing.
Quick note: I’m still working on a platform transition. Since the last issue, I’ve set up a site for archives of the newsletter at emergingtech.law. (Note: The site is still very much a minimally viable product and if it were the late 1990s, it would have one of those awesome “under construction banners.”)
In this issue:
The DAO: An introduction to the Decentralized Autonomous Organization.
United States and China scuffle over Quantum Computing
Researchers make gene-editing breakthrough.
Quote of the week:
“Life is collaboration. Where I think art can be sort of misguided is that it propagates this idea of itself as a solo love affair – one person, one idea, no one else involved.”
-the late Virgil Abloh, fashion designer and entrepreneur
Decentralized Autonomous Organizations
What started with a bold idea – let’s buy one of the few original copies of the U.S. Constitution – grew on social media to an epic movement that raised more than $40 million through contributions in cryptocurrency to a failed auction bid and then turned into a potentially costly mess that only a lawyer could love.
That’s the short story of the ConstitutionDAO – a loose confederation of thousands of people who came together through social media in the space of a few days to raise nearly $47 million to buy one of 13 original copies of the Constitution in an auction held by Sotheby’s. The ConstitutionDAO was the second highest bidder, losing out (ironically) to hedge fund manager Ken Griffin. Now that its primary mission (actually, its only mission has failed) the leaders of the leaderless group are struggling to unwind the organization, which has been complicated as some contributors are finding that the fees to retrieve their contributions are in some cases as much as the contributions themselves.
Despite its struggles, the ConstitutionDAO shows the power and possible potential of a new type of organization called a decentralized autonomous organization, better known by its acronym DAO (rhymes with Dow or Tao, if you prefer something more Zen/less old-school capitalist).
What is a DAO?
Like much in the blockchain/decentralized finance/crypto world, the definition of a DAO is a little loose.
DAOs can come in all shapes and structures, but simply put, “a DAO is an internet community with a shared bank account,” Cooper Turley, an investor and builder of several popular DAOs, told CNBC Make It.
“Basically, a small group of people come together to form a chat group, and then they decide to pull capital together, [typically] using [a cryptocurrency] wallet,” Turley says. From there, they decide how to fund their DAO’s mission collectively.
The first DAO, which was appropriately called The DAO was formed in 2016 as an investment vehicle, like a blockchain/crypto version of a venture capital fund. Like the ConstitutionDAO, The DAO was highly effective at raising money, cryptocurrency worth about $150 million, but even worse at execution. Exploiting a security vulnerability, hackers transferred about $50 million worth of crypto out of the organization, which ultimately led to its demise.
DAO’s, though, have had some success. In an improbable story, a DAO called the PleasrDAO raised the funds and bought a single-edition double-CD, in a silver case, recorded by the hip hop group Wu-Tang Clan for $4 million. The US government had seized the album, titled “Once Upon a Time in Shaolin”, from “Pharma Bro” Martin Shkreli, a hedge fund manager who became known for extravagantly raising drug prices and was eventually convicted on fraud charges.
PleasrDAO released a video about the purchase called “We Bought the Unreleased Wu-Tang Clan Album with Crypto” including a brief snippet from the album, which by contract cannot be released until the year 2103. Jamis Johnson, “Chief Pleasing Officer” of the PleasrDAO who appears in the video told The New York Times, “This album at its inception was a kind of protest against rent-seeking middlemen, people who are taking a cut away from the artist. Crypto very much shares that same ethos.”
Perhaps not coincidentally the Wu-Tang Clan recorded the single-edition album to introduce scarcity to its music. One of the primary benefits of blockchain technology, which is at the heart of cryptocurrency and the smart contracts that can be used to govern DAOs (more on that shortly) is the ability to create unique digital goods. These unique digital goods can be in the form of non-fungible tokens (NFTs), which can capture unique pieces of art or music.
One of the primary activities of The PleasrDAO is the acquisition of NFTs, including one released by U.S. intelligence whisteblower/traitor (depending on one’s perspective) Edward Snowden.
DAOs are not limited to acquisition of art.
Kimball Musk, brother of Elon, announced in a Tweet on “Giving Tuesday” that he is starting the first “Giving DAO” as an “experiment to decentralize philanthropy.”
And DAOs are being viewed as the vehicles for philanthropy, venture investments and whole slew of other possibilities.
The DAO has some advantages over the traditional corporate and non-profit structures:
The distributed, horizontal nature of DAOs may make them better fits for the fast-moving, dynamic world of the early 2020s in which information flows too quickly for traditional command-and-control business organizations.
By enabling the inclusion of an extensive number of stakeholders, they may be able to incorporate a wider set of viewpoints on issues such a diversity, inclusion and impact on the climate than a traditional corporation.
They may enable business models that would be unable to attract financing under otherwise currently available options. Venture capital aims for enormous multiples of returns on investment, but not every business is the next Google, Instagram or Facebook and not every business even has aspirations of such highly scaled growth. Conversely, businesses that are not good candidates for venture financing are not necessarily good candidates for traditional debt financing. Try walking into your local bank and pitching your idea for an NFT-based art studio and see if you walk out with an SBA loan. If you don’t have access to friends and family with money to invest in your business and you’re not otherwise wealthy, your business idea will only be a dream
DAOs also may provide a vehicle for the expression of the talents of the millions of people who are leaving their corporate jobs during the “Great Resignation.”
In theory, the key governance mechanism for DAOs is a “smart contract.” It’s blockchain-based software that is set up to manage the organization’s treasury and to distribute funds according to rules that are incorporated into the software. This is the “autonomous” component of the decentralized autonomous organization.
In a simple example, imagine a DAO with a mission to raise money to engage an artist to create a piece of artwork that would be sold as an NFT with the resulting funds distributed to all members of the DAO equally. The smart contract could be programmed to ensure contributions from members were included in the DAO’s treasury, ensure that the artist was paid upon submission of the artwork and ensure that the organization’s members were paid upon sale of the art.
The problem is that the management of a business – even one with a fairly simple mission – is complex. In the hypothetical example, what happens if the market for NFTs takes a nosedive? What happens if the artist submits subpar work or becomes involved in a controversy that would impair the value of her art? Programming for a multitude of issues is challenging, and so far, artificial intelligence systems aren’t really up to the task of managing a business.
And even though command-and-control models for businesses are no longer effective governance structures, the opposite – a totally leaderless organization also is a challenging structure. An organization in which potentially thousands of members all have a voice in decisions, particularly if certain members aren’t empowered to make routine decisions, such as procurement of low-dollar value business essentials such as software or equipment, will eventually be unworkable.
Even with the ConstitutionDAO, a singular-purpose organization, it has taken a substantial effort to try to unwind it, and even though the organization is in theory leaderless, a core group of leaders, including lawyers has been heading the effort to solve issues as the DAO shuts down.
Not only do DAOs carry a high risk for creating governance issues because of their lack of structure and inability to capture the complexities of managing an organization through a smart contract, the law in the U.S. creates potentially harsh outcomes for participants in DAOs.
One of the key features of corporate law in the U.S. and one of the key reasons for the nation’s economic success is the enablement of structures that allow for capital to be raised and property to be owned by entities that also shield the participants from personal legal liability.
Corporations, which protect individual investors from personal responsibilities for losses enabled the risk-taking that was necessary for the U.S. economy to grow to nearly $21 trillion in annual GDP. Imagine whether we’d have Apple if Steve Jobs and Woz knew they’d have been put out on the street if the company had failed.
The law, though, requires that organizations fit into a particular structure to shield their members from personal responsibility for the organization’s debts. As a default, though, an organization like a DAO is likely to be treated as a partnership by a court, and that has bad consequences for members of the DAO.
Under partnership law, absent a formal partnership agreement, each member of the organization is individually personally responsible for the debts of the organization.
Imagine if the ConstitutionDAO had been the high bidder in the auction for the Constitution and had been bound by contract to follow-through with the purchase. Imagine that just after the auction closed, hackers removed the funds from the ConstitutionDAO’s treasury; in theory Sotheby’s could have sued any member of the DAO for the full amount of the auction price.
Another unfortunate feature of partnerships as the default structure for DAOs is that, without a partnership agreement that imposes restrictions, any member can transact on behalf of the organization. Imagine a shopping spree of Lamborghinis, Richard Mille watches, private jet trips and Dom Pérignon champagne, and you get the idea of the problem.
There may be a solution. The state of Wyoming is aiming to replace the economic loss from the (soon-to-be-dying) mining and cattle industries by improbably becoming the capital of blockchain businesses, has set up a corporate structure that allows DAOs to form as limited liability companies (LLCs). This allows members of the DAO to shield themselves from personal liabilities and establishes a structure for business decision-making.
Upon passage of the law, Marian Orr, CEO of the American CryptoFed DAO, stated, "Wyoming is the leading digital assets jurisdiction in the USA, and now with this DAO law, Wyoming is arguably the top blockchain jurisdiction in the world. What this means is that creating a true digital currency with mass acceptance is now possible."
If the DAO continues its increasing popularity as a way for people to come together to do business or engage in philanthropy, expect other states to follow Wyoming’s lead and for other options to arise.
The U.S. continues to press its tech war with China.
The Commerce Department recently announced that is sanctioning eight Chinese quantum computing companies that it alleges are supporting China’s military.
The Department placed the companies on the “Entity List,” which means U.S. companies must obtain permission to export certain products to them.
The action was taken to “prevent U.S. emerging technologies from being used for the PRC’s quantum computing efforts that support military applications, such as counter-stealth and counter-submarine applications, and the ability to break encryption or develop unbreakable encryption,” a statement from the Commerce Department claimed. “These PRC-based technology entities support the military modernization of the People’s Liberation Army and/or acquire and attempt to acquire U.S. origin-items in support of military applications.”
The action by the Commerce Department is one a series of actions taken against Chinese tech companies allegedly for national security reasons. For its part, China has repeatedly claimed that U.S. sanctions against Chinese companies are not the result of genuine national security concerns, but instead are economically motivated.
Liu Pengyu, an official at the Chinese embassy in DC, said the US “uses the catch-all concept of national security and abuses state power to suppress and restrict Chinese enterprises in all possible means.”
The U.S. and China are engaged in a battle for technological superiority, similar to the race between the U.S. and the Soviet Union in the 1960s to be the first to land humans on the moon. Quantum computing is one of the primary fronts in that battle.
Quantum computers may be capable of solving some kinds of problems many times faster than classical computers, and China and the United States each is aiming for dominance in this field.
Researchers use gene-editing tool to discover potential mechanism for treating inflammatory diseases such as multiple sclerosis and inflammatory bowel disease.
A team at Vanderbilt University School of Medicine pinpointed a gene called MTHFD2, which makes an enzyme necessary for the development and functioning of the immune system's T cells.
Suppressing or eliminating this gene may be a treatment for certain inflammatory diseases, without otherwise impairing the immune system.
“Overall, our findings show that MTHFD2 may be an effective drug target for anti-inflammatory therapy for a wide range of inflammatory and autoimmune diseases,” Dr. Jeff Rathmell, Director of the Vanderbilt Center for Immunobiology, told News Medical in an interview. “Many of the drugs currently in use can completely suppress the immune system and have many adverse side effects, including susceptibility to infections. Our studies indicate that MTHFD2-targeted therapy may potentially have fewer adverse effects and be effective without being broadly immune suppressive.”
Gene-editing has suffered a number of setbacks lately, but the Vanderbilt research shows the promise of the technology.
The Federal Trade Commission filed a complaint to block the planned merger of graphics card giant NVIDIA with U.K. semiconductor chip-licensing firm ARM. The FTC’s action will likely kill the deal. The FTC claimed that the merger would “would distort Arm’s incentives in chip markets and allow the combined firm to unfairly undermine Nvidia’s rivals.”
The U.S. Department of Defense announced that is kicking off a $173 million effort to test 5G technology.
The Wall Street Journal is holding a free online Women In: The Tech Industry event on January 18, 2022, from 12-1:45 pm Eastern. Registration is here.
“Peace is the absence of confusion. When we are not confused about person place or thing or self we can find peace.”
-RZA, leader of the Wu-Tang Clan.
Obligatory disclaimer: Any opinions are those of the cited source or the author of this newsletter, not the author’s employer. If for some reason you think any legal advice is given in this newsletter, you’re sadly mistaken.