Research Report
- A Study on the Legislation for Regulatory of Decentralized Finance -
Ⅰ. Backgrounds and Purposes
▶ Decentralized Autonomous Organizations (DAOs) have emerged and ICOs have been launched as a new form of financing for DAOs.
○ Decentralized autonomous organizations (DAOs) refer to autonomous and decentralized organizations that operate through blockchain-based smart contracts.
- ICO stands for Initial Coin Offering which is used for financing DAOs.
○ After establishing a decentralized autonomous organization, they will raise funds through ICOs. We will look at this situation and propose a legal and regulatory direction for the means of financing DAOs.
- Although ICO has the nature of financing, the legal nature of ICO is different from IPO in the traditional stock market because coin or token holders do not haver a direct right to the issuer company.
-Coins or token are also different from securities because of their usage as an utility
-Therefore, we intend to conduct a study on how the rights relationship between those who purchased coins issued by DAO and those who purchased company stocks are different and how to regulate the fundraising activity of ICO.
Ⅱ. Major Content
▶Concept and structure of DAO and Analysis of various cases
○ Concept and structure of DAO
-DAO stands for Decentralized Autonomous Organization. Decentralization means decentralization of infrastructure, payment and settlement methods, manpower structure, governance and communication methods. Autonomous means autonomy, which means autonomy of an external control.
-The types of DAO are very diverse. There are several types of protocol DAO, Defi DAO, investment purpose DAO, etc.
○ Protocol DAO
-A DAO whose purpose is creating a protocol as a block chain infrastructure is Protocol Dao. Ethereum is one of the most representative protocols that are actually operated. Cardano, Polygon Matic, Polcadot, etc. have organized DAOs to raise funds and those projects raised funds by ICOs. They basically have a member's proposal and voting structure, which is called "governance". Most of them(Protocol DAos) issue governance tokens to raise funds by conducting ICO and made protocols and operate them now.
○ DAO for Defi operation
- Most famous cases are MakerDAO and Synthetix cases. In the case of DAO for Defi operation, in general, DAOs make a structure that provides a liquidity pool that allows users to deposit and collateralize various digital assets.
- DAOs induce staking of various assets (delegation for proof of stake) and pay governance tokens in return.
-Governance tokens are required for voting and operation, and governance tokens must be staked to exercise voting rights.
○ Venture investment DAO
- DAOStack and MetaCartel are representative
- In a venture investment DAO, the DAO takes the role of raising funds with the virtual assets of investors, and several business executive member select teams or projects to invest and execute the funds.
- Both the case of raising funds through an ICO through public offering and the case of closed operation with less than 100 investors exist.
○ Other investment purpose DAO
- Introduced Treasure DAO and Flamingo DAO
- After determining teams or projects to invest (or target team) and recruiting members, DAOs distribute the funds of the treasuries after a certain period.
- DAOs are closed organization and does not sell tokens in public.
○ DAO and funding
- Protocol DAO and DAO for the purpose of operating Defi raise funds through ICO, which is sold as a public offering after issuing tokens.
- Investment DAO raise fund in a various way. There are who raise funds by ICO and others raise funds privately. In case of closed type, we do not conduct ICO.
-In relation to the operation of the DAO, proponents claim that transparency of fund management is guaranteed, but Opponents criticize the centralized structure without real transparency.
▶ Judgment on how to raise investment funds and review of legal issues
○ Types of tokens and funding methods
-Tokens are divided into three types: asset type, utility type, and payment type. Fund raising can be divided into two types: public and private. ICO is an open funding method that means public sales. On the other hand, there are also closed-type financing methods such as those seen in the investment DAO case that is private placement.
○ Regulations on financing and DAO if tokens are not sold through public offering
- It is necessary to discuss the regulatory direction for financing in investment DAO, which is a representative example of closed DAO.
-In the United States, it is operated in a manner similar to that of a private equity fund that only professional investors can participate in, and the organizational structure is in the form of a limited liability company.
-In the case of Korea, if the establishment of a closed DAO is allowed, both the fund type based on the Capital Market Act and the individual law will be possible. If it becomes a investment fund under the Capital Market Act, it will become a private equity fund. In this case, the collective investment scheme can be a limited company under the Commercial Act.
○ Regulations on financing and DAO when tokens are sold through public offering
-A typical case of selling tokens through public offering is ICO. Recently, new forms of financing such as IEO and IDO have appeared, but there is a difference in the initial sales entity and token distribution method.
- Currently, the type of token sold through public offering is a utility token. However, even if the issuer issues a utility token in the form of a utility token, the legal nature of the token is determined in light of the substance, so it may be classified as a security.
- In this regard, each country is proposing standards for classifying the legal nature of tokens, and it is expected that the Korean financial authorities will separately regulate security tokens and non-security tokens.
- In the case of the United States, most of the tokens issued through ICOs are viewed as securities, but looking at the European MICAR, the scope of tokens exempted from financial products is broader than that of the United States.
- Discussion is ongoing on whether the scope of tokens recognized as securities under the Capital Market Act can be viewed as the same as the scope of securities defined by US regulatory authorities. In light of the wording, it is inappropriate to view the same as the scope of U.S. securities without active profit distribution or equivalent action by business operators.
▶ Policy implications and regulatory direction for investor protection
○ Need for a separate funding system for DAO
- In the case of open funding, if it is classified as a security type, a funding system for this is unnecessary and will be done according to the Capital Market Act.
-In the case of closed-type financing, there are two methods: the method of utilizing the system under the Capital Market Act and the method of stipulating it as a fund under the Special Act. If the system under the Capital Market Act is used, there is no association under the Civil Act in the form of the current collective investment scheme, so it is possible to form a fund using the form of a limited liability company. However, in order to take into account its characteristics, a separate registration system is required to make it a fund under the special law and to bear the legal responsibility for the management entity.
Ⅲ. Expected Effects
▶ Classification of fund raising method through classification of DAO’s significance and concept
○ Classify DAO into closed type and open type, and separate regulatory methods for each funding method
○ There are claims that DAO is decentralized and all participants are directly involved in its operation, so it cannot be subject to actual regulation like a union under the civil law. confirming the need to regulate