A season of spectacular scam-explosions means that regulators are finally taking crypto seriously. Bring it on. The scammers are hiding old-fashioned frauds behind the veil of a confusing new technology, and we have old-fashioned rules for that. But the crackdown is also a chance to encourage the better part of what blockchains have enabled: an explosion of network-native organizational creativity.

The leading frameworks for US crypto policy, from the Biden administration’s executive order to the back of Sam Bankman-Fried’s napkin and the work of his Congressional allies, share a common assumption: that crypto is all about financial assets. If that is the case, the challenge of regulating it is ultimately a matter of applying existing frameworks for protecting investors, along with other consumers of financial services. Is a given token a security or a commodity? Should an exchange be treated like a bank? How can the law prevent systemic scams from undermining investor confidence?

Protecting investors is well and good, but crypto is about more than finance. Many early adopters do not aspire to the pecuniary subjectivity of an investor. Just as most Americans own little or no corporate stock, lots of what is happening in crypto is not really about investment. It is a flurry of co-creation, coordination, collaboration, and imaginative co-governance, increasingly through a new kind of organization that operates through software on the Internet, not the laws and courts of a government. Decentralized autonomous organizations, or DAOs, represent an opportunity to reimagine how human beings play and work together—and, potentially, to share power and wealth more equitably.

Notably, the dangerous crypto meltdowns so far have been emanating from centralized entities, not their DAO-based competitors. The Terra Luna stablecoin collapsed, but MakerDAO’s DAI has kept its peg to the dollar; FTX collapsed, but not the decentralized exchange Uniswap. Still, there is growing hesitation among DAOs to distribute their tokens in fair ways to their communities, for fear of running afoul of financial regulation. While cracking down on the scammers, regulators should protect the better stuff and enable it to flourish.

Yes, that Section 230

We might take guidance from the ever-controversial 1996 snippet of US law known as Section 230. In short, Section 230 protects online services from liability for the content users post on them. As the title of legal scholar Jeff Kosseff’s book on the topic puts it, these were “the twenty-six words that created the Internet.”

Abolishing Section 230 was just about the only thing Donald Trump and Joe Biden could agree on while campaigning against each other. It was a convenient political position because both likely knew Congress would not fundamentally change anything. Without Section 230, we could lose much of what makes the Internet interesting and lucrative: the user-generated content, the near-permissionless interactivity, the memes that take on a life of their own.

Section 230’s protection is not absolute; certain things are manifestly illegal to publish. But the law invites social-media companies to moderate user content as they see fit, following their cultures and markets rather than the fear of being sued or prosecuted. The result has been all the ambivalent vivacity of online life.

In crypto, the vivacity worth protecting is not speech so much as self-governance. Bitcoin, for all its faults, was transformative in enabling direct control of a money system by its participants—in that case, the miners who contribute computing power. Its descendant blockchains have enabled much more, through on-chain smart contracts and collaboration practices for people who know each other only on the Internet. DAOs often do not fit neatly into established forms of nonprofit or for-profit organization. They might not need the kinds of management hierarchies that are ubiquitous in organizations made of paper and office buildings. Some DAOs use those familiar structures, while others are inventing other decision-making techniques that better suit their tools and their challenges. The point of a platform for DAOs is to encourage experimentation—to do in corporate and securities law something similar to what Section 230 did for user-generated content.

As with social media, not all the experiments will be good for the world. A Section 230 for crypto would seek to protect the organizational creativity but not the abusers. Allowing an outpouring of new possibilities should also involve taking steps to minimize the harm.

The shape of the platform

A platform is a set of policy proposals, the list of priorities for some political bloc. But the word also refers to an elevated place, a stage, or a launchpad. The rules for what takes place there may be different from the rules elsewhere. A platform can be a gateway—to an imaginary world, to the sky, or to outer space. I mean the word in all these senses. The shape of the platform that policy builds will shape the kinds of network-native organizations that do and do not take off there.

Every stage has boundaries. These are the lines that separate it from the audience and the world outside, the points of entry and exit. DAOs need boundaries that establish how these new virtual jurisdictions can live in harmony with the jurisdictions that govern our geographic territories.

The platform’s boundaries could be crafted through corporate registration, such as the Wyoming DAO LLC, the Colorado Limited Cooperative Association statute (my home team!), or an unincorporated nonprofit association. Perhaps more elegantly, as the COALA DAO Model Law proposes, DAOs that meet certain standards could bypass registration altogether, freeing them to come in and out of existence on their own terms. One way or another, within boundaries like these, DAOs should have the ability to organize themselves as their participants see fit, and those participants should have basic protections like limited liability and some form of legal personhood.

Transparency of operations

Much of the law regulating public companies is designed to produce transparency: registration, regular filings, disclosures of financial data, the works. In DAOs, much of the relevant data is out on the Internet in real time. Their financial transactions and decision events, at least in principle, are visible for all to see on a blockchain.

The first obligation for climbing the DAO regulatory platform should be to make good on the promise of transparency. COALA’s Model Law explains what this could look like in detail. It must be clear, both to computer analysis and to non-technical users, how the DAO works and what it is doing. All its transactions and decisions should be available and auditable on public, non-permissioned blockchains. If DAO participants operate wallets or contracts not clearly linked to the DAO’s core contracts, those assets are not part of the DAO. Above all, participants and regulators alike should be able to analyze the activities and structures of the DAO to protect against exposure to fraud. The crypto ecosystem already includes a set of sophisticated tools for DAO analytics and dashboards that help users participate in many DAOs simultaneously.

DAO transparency will depart from conventional legal expectations. DAOs are creatures of networks above all. They should allow international, anonymous participation, to be judged by what they do rather than who or where participants are.

Sufficient decentralization

In 2018, a federal regulator made a speech indicating that the tokens of blockchain networks that were “sufficiently decentralized” would not be treated as securities. After that, many entrepreneurs became more careful that they were really living up to crypto culture’s aspirations of decentralization—or else they could face additional regulatory burdens. It’s a case where the better impulses of crypto and government have been mutually beneficial.

Decentralization is a tricky term, but here what we mean is the broad distribution of control among distinct participants. This is important both for practical and social reasons. Practically, decentralization reinforces transparency, by ensuring that important actions require public discussion among stakeholders. Socially, decentralization helps ensure that DAOs become vehicles for collective action more than feudal consolidation. The recent collapses of highly centralized entities also suggest that decentralization can bring greater resilience in the face of volatile markets.

Coinbase’s Brian Armstrong suggests that publicly distributing just 5-15 percent of token supply is considered sufficient decentralization lately; I would expect that no one participant should be able to hold that amount. The exact thresholds may need to be context dependent, based on the nature and maturity of a project. If audits produce evidence of Sybil-like behavior or collusion, regulators would be relinquished from their obligations to provide protections. Further, participants should always have the option to remove themselves and their assets from the DAO—colloquially, to “ragequit”—to ensure that the entity cannot hold them hostage.

Participant control

The final boundary I propose is likely to be the most controversial, but I consider it potentially the most important: that DAOs on the regulatory platform should be entirely controlled by direct, active participants, not by investors contributing only capital. As with sufficient decentralization, expecting participant control is a way for governments to encourage the things about DAOs that really open new doors.

There are a few further reasons for this requirement. For one thing, participant control is a bulwark against the widespread problem of investor capture in DAOs—when wealthy funds or whales buy up governance tokens and have the power to control whole communities. Participants are also likely to be the most well-informed governance participants; in particular, they may be uniquely equipped to interpret transparent data flows on a decentralized network through the lens of direct experience. Conversely, when token-holding is really only an investment, it should be just that. Give to Caesar what is Caesar’s, and let real community members keep what’s theirs.

This approach has precedents. The laws governing investment clubs tend to expect active participation of members as the price of avoiding normal regulatory scrutiny. Among cooperative businesses, the use of non-voting preferred stock has enabled members to retain their governance powers while accessing outside capital. DAOs could similarly issue investment tokens separate from the tokens with governance rights. As with preferred stock, which receives financial benefits before common-stock holders do, DAOs will want to design investment tokens so that investor and participant interests are generally aligned.

Participant control is not as far from current practice as it might sound. Large DAOs often exhibit low rates of voter turnout among token-holding investors, and some investment firms have even made a habit of delegating their voting power to committed participants. To require participant control builds on emerging best practices and protects good governance from overbearing investor power.

The participant-control requirement does present some practical challenges. It presumes that the DAO has some way of validating that a user has been—and continues to be—an active participant, such as by contributing labor or using its products. Increasingly validation of this sort is possible through projects like Coordinape and SourceCred, which track and reward value-producing participation. Something along the lines of soulbound tokens would be needed to ensure governance rights stay attached to the actual participant.

While this boundary is in some respects furthest from current DAO designs, it is becoming feasible enough to expect as a basic requirement. Existing DAOs not designed for participant control could have a choice: to migrate governance power to participants, while enabling other token-holders to retain financial tokens, or to register as issuers of conventionally regulated investments.

A platform is a training ground

President Biden issued his executive order on crypto regulation just a few months after holding a “summit for democracy” in late 2021. But he didn’t seem to identify a possible connection between the two. At a time when democracy around the world is under threat, this is a chance to enable a renaissance of democratic practice in everyday online life. DAOs present an opportunity to turn the online economy from feudalism toward shared ownership, and to make it a training ground for effective self-governance in our territorial communities and governments.

In order to salvage some real benefits from the ambivalent outbreak of crypto, we need to do more than simply fold this ecosystem into the existing financial regulatory regime. That regime has failed too many of us, especially those who are not wealthy investors worthy of its protections. Organizational innovations in crypto need protections, too, so their better angels can win out over the fraudsters.

I am grateful for substantive feedback on earlier drafts of this article from Caleb Shough, Connor Spelliscy, Irina Marinescu, Joni Pirovich, Joshua Tan, Morshed Mannan, and Primavera De Filippi.