Here Is How The DAO Will Soon Become The Greatest Threat Banks Have Ever Faced

Editors’ Note: As part of our increasing coverage into the role that crypto-currencies will play in emerging markets, and more broadly our entire world, we are returning this week to a recent phenomenon that has the technology world abuzz. The DAO, or Distributed Autonomous Organization, may soon disrupt the entire idea of how we think about companies – a structure that seems as old as time, but as Adam Cleary explains, may soon become as obsolete as the telegraph.

The DAO crowdsale at daohub.org has now raised the equivalent of US$150m in just 25 days, making it larger than many traditional equity and bond issues. This feels like a transformational moment – when we realise how little of the existing paraphernalia of the financial markets is actually necessary.

Success has predictably brought forward cries of outrage from defenders of the old system, with three principal criticisms being levelled at the project.

The first, and most valid, criticism is that the DAO may have a collective action problem, as token holders will lack the expertise and the interest to engage in continuous voting. This is a possibility, as there is no specific financial incentive to consider proposals and vote. This may require the configuration of future DAO smart contracts to be amended, in order to incentivise participation in some way. As with all new structures some perfecting of the structure will be required and will be accomplished over time.

The second criticism is that the DAO is not legal, because it does not comply with securities law. I find it difficult to get too excited about this: when one observes that these same securities laws appear to be regularly flouted with impunity by the largest investment banks then criticism of the DAO for not complying with such laws has a distinct whiff of hypocrisy. It is hard to avoid the impression that these laws can be viewed simply as a means of enforcing the privileges of established fund raising entities and platforms.

Historically in England it was impossible to set up a limited liability company without an Act of Parliament, and only in 1857 was it finally possible to do this in a permission-less way. This prohibition was effectively a deliberate means of preventing ordinary people from using this valuable innovation (the joint stock company) in order to improve their own prospects through entrepreneurship.

Setting up a company is now easier – at least in developed countries. However, the accompanying step – the provision of finance for new projects – has continued to be cartelized by powerful vested interests who extract large rents at the expense of prospective entrepreneurs. One only has to note the 7% fee levied by many equity crowdfunding platforms to see this, a fact that belies any claims that these crowdfunding platforms are leading-edge fintech companies, or in any way innovative and democratic!

If one adds up the costs of raising money through traditional equity or bond issues in the current age one will rarely get change from 10%-12% of the amount issued. One small start-up I am aware of recently paid 20% of the amount raised in legal fees for the gracious privilege of documenting a seed round.

The third criticism is: what problem does the DAO solve? Naturally this criticism comes from the very same people who benefit from the rents extracted from traditional fundraising.

And this is the most important point of all. The answer is that the DAO solves the principal-agent problem – which is the source of almost all mismanagement in traditional corporate and fund management structures. By removing delegated power from directors and placing it directly in the hands of owners the DAO removes the ability of directors and fund managers to misdirect and waste investor funds. The people who dislike this are, of course, the directors and fund managers who greatly enjoy their current privilege of using the money raised from investors without having to fully account for it – power without responsibility.

The DAO is an exciting innovation precisely because it enables us to break free in a permission-less way from the fetters of the existing system. The criticisms are revealing as they lay bare the bankruptcy of the status quo. They are reminiscent of 19^th century arguments against building railways – on the basis that it would be socially disruptive to allow the population to travel long distances easily.

I look forward to the day when the DAO allows us to fund millions of local projects globally in an infinitely more efficient and low-cost manner than the existing system. Emerging markets where entrepreneurs still struggle to set up companies and where finance is non-existent will now be able to raise money directly through a DAO. This is the true promise of the DAO – enabling project finance that can be democratised and extended to every human being, in every emerging market, all over the world.

Adam Cleary is an entrepreneur, digital currency investor and investment manager. Adam runs Cavenham Capital Limited, which advises investors on digital currency investment www.cavenhamcapital.com. Follow him on twitter @adc555

The views expressed represent solely the personal opinion of the author and do not constitute a recommendation to purchase or invest in any securities.