Kevin Schwartz and David Adlerstein are Attorneys at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell memorandum by Mr. Schwartz, Mr. Adlerstein, David E. Kirk, and I. Andrew Mun.
While recent gyrations in cryptoasset markets have focused attention on the future contours of stablecoins, market-making, and impending regulation, another feature of the blockchain landscape is also confronting noteworthy challenges. Specifically, a new breed of business organization has emerged that is defined by its rejection of the centralized, traditional governance structures at the heart of our modern corporations. These decentralized blockchain-based organizations are conducting a substantial, growing volume of business activity, and many are encountering a variety of governance challenges. Some of these challenges are novel, but many others strikingly resemble those that corporations have confronted for decades. We believe that governance design for these organizations should heed some of the hard-fought lessons that have helped to form the pillars of modern corporate governance.
Blockchain networks that allow the limitless programming of computer code (such as Ethereum) enable software developers to create business applications that run without the need for further human administration. A prominent example is Uniswap: a decentralized application that enables the trading of cryptocurrencies through an automated market-making function, with more than $1 trillion in trading volume to date. Decentralized trading exchanges like Uniswap are but one flavor of business activity using decentralized blockchain protocols. Among other examples, there are popular decentralized applications for collateralized lending and even more sophisticated financial applications.
Very often, these protocols are controlled not by a central managerial authority or corporate organizational documents, but rather by a diffuse group that governs the protocol by referendum, in accordance with parameters built into the computer code. Blockchain applications governed in this manner are known as Decentralized Autonomous Organizations (“DAOs”). Typically (as in the case of Uniswap), the right to vote in a DAO’s governance is based on ownership of a cryptoasset known as a “governance token,” akin to voting rights in a corporation. There are thousands of DAOs of varying design, from simple single-purpose organizations, to elaborate formats melding governance by DAO tokenholders with traditional corporate forms. DAOs collectively hold billions of dollars of assets and can conduct business at significant scale—for instance, by pooling participants’ capital, by transacting or investing in both cryptoassets and other assets, and by interacting with other blockchain protocols and DAOs, all without centralized management or the involvement of traditional legal entities.
The SEC’s Cyber Disclosures
More from: Alex Sharpe, Shivaram Rajgopal
Shiva Rajgopal is Roy Bernard Kester and T.W. Byrnes Professor of Accounting and Auditing at Columbia Business School, and Alex Sharpe is founder of Sharpe Consulting LLC. This post is based on their recent comment letter to the U.S. Securities and Exchange Commission.
This post is based on a comment letter on the SEC’s cyber disclosures submitted jointly by me, Shiva Rajgopal, and my co-author, Alex Sharpe. I chair both the Cybersecurity and Board Director programs for Columbia Business School, entitled Leading Cybersecurity at Your Organization and Corporate Governance Program: Developing Exceptional Board Leaders respectively. Alex Sharpe is a long-time cybersecurity and business strategy professional with real world operational experience. He has over 30 years of experience working these areas nationally and internationally for both the public and private sectors including the U.S. Intelligence Community and regulators.
To frame our comments, it is useful to summarize what the new SEC rule asks for:
We support the new requirements in principle. However, we believe these requirements do not go far enough in certain areas and can be refined in others. We also believe that the rules need to be expanded to address all three of the Commission’s roles. As written, the proposed changes are highly focused on near term aspects of protecting investors (the first role): (i) protect investors; (ii) maintain fair, orderly, and efficient markets; and (iii) facilitate capital formation.
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