Malta Technology Arrangements – The Return of The DAO?
I’m here about my application
Malta’s legislation to provide a comprehensive framework for blockchain, cryptocurrency and other virtual assets, noted in our blog on May 7, was passed by the Maltese Parliament on June 26. It is already creating ripples of speculation about the future of the 'Decentralized Autonomous Organization' (DAO), a new form of organization with little or no human governance that is built on smart contracts and resides on a blockchain.
The first DAO was a spectacular if intriguing failure, raising over $150 million for an autonomous venture capital fund in the most successful crowdfunding project of 2016. It was hacked within days and quickly drained of $50 million. Among other 'firsts,' it led to the SEC’s foundational statement on the application of U.S. securities laws to crypto assets.1
The concept may be irrepressible and there has been continuing experimentation with modified approaches that seek to avoid the vulnerabilities that doomed the original project.
Now Malta has given the discussion a big push forward. On June 26, its Parliament passed the Virtual Financial Assets Act, the Malta Digital Innovation Act and the Innovative Technology Arrangement and Services (ITAS) Act, a trio of new laws intended to establish a complete, holistic regulatory environment for virtual assets. Under the ITAS Act, an organization may apply to the new Malta Digital Innovation Authority (MDIA) for recognition under the Act. The MDIA will among other things audit the smart contracts of the applicant and verify that it has a registered agent and technical administrator. If the application is in order the authority may register the applicant as an Innovative Technology Arrangement (ITA).
Interestingly, Section A.10(5) of the ITAS Act provides that a qualifying service provider may be registered as an ITA if it is an organization ‘with or without legal personality.’ This suggests that the Act may pave the way for a DAO, which can be described as an organization without legal personality, to achieve some form of recognized legal status under Maltese law.
The consequences of granting a DAO recognized status under the laws of Malta could be remarkable because Malta is a member state of the EU. Other member states may be legally obligated to treat a Maltese-registered DAO as a legal entity for other purposes, potentially enabling it to buy and sell property across the EU, operate businesses and engage in business transactions with human persons, companies, or other DAOs.
In addition to the prospect of new forms of non-corporate social and economic organization, the implications for the physical objects which are part of the ‘Internet of Things’ and AI-based autonomous systems are clear. The European Commission has already been grappling with legal issues relating to AI and robotics, particularly with regard to consumer protection and liability for damage and this may accelerate the discussion. In the U.S. there has been speculation about the possibility of fleets self-driving vehicles that would operate without human drivers and also possibly without human or corporate owners.
There are many issues ahead and the response of European and other global regulators to the Malta initiative is still to be seen. However, Maltese officials have proclaimed that Europe must decide whether to lead or to follow and “Malta has chosen to lead.”
1 In the interest of clarity, it was not the blockchain itself that was compromised. Hackers broke in though connected non-blockchain software used to temporarily pool the incoming funds for investment. In addition, all affected investors were later made whole through a ‘hard fork’ in Ethereum.