Mutual Distributed Ledgers (aka Blockchains) have generated a great deal of excitement over the last couple of years, with the growing realisation that they have applications beyond cryptocurrencies. From secure systems to manage the ‘internet of things’, to trading platforms and government systems, Mutual Distributed Ledgers (MDLs) have potential to be a transformative technology. However, in the rush to embrace the future, it is important to ensure that this technology does not erode the accountability of governments and businesses who are employing it.
The Cardano Foundation recently sponsored Long Finance research designed to examine the challenge that Mutual Distributed Ledgers (MDLs) face with respect to governance. As part of this process, an examination was made of whether different types of MDL require different approaches and the type of tools that were required to deliver effective governance outcomes.
Governance is the mechanism that enables organisations to be accountable to their stakeholders whilst delivering their long term objectives.
With respect to MDLs, the issue of governance raises a number of key questions:
There are two type of ledger:
These two types of ledger lend themselves to four different use classes, each of which requires different governance structures. The table below illustrates the four different use classes and the types of governance structures they require:
|Type of MDL||Use Class||Governance Structure|
Little formal governance structure (e.g. cryptocurrencies).
An autonomous association, jointly owned and democratically controlled.
Governance structures of sponsoring agencies grafted on (e.g. land registries or identity).
Board members are appointed by stakeholders, or the board itself, to bring particular knowledge and skills to the table.
Highly defined governance structure (e.g. platforms for blockchain-based applications for business ecosystems).
The individuals that comprise the board are the owners or stakeholders.
Established and managed by a group of organisations rather than a single entity, likely to have a complex governance structure (e.g. Financial Services or Internet of Things (IoT) platforms).
Board members are elected to their positions and tenure is for a fixed period.
|Permissioned||State-Sponsored and Consortium MDLs (see above)||
For organisations that wish to have members who are enterprises instead of individuals. This structure may be appropriate for both consortium and state-sponsored MDLs.
The relationship with users is affected by the governance structures chosen for the MDL. For appointed boards and oligarchies, consultation with the users of the MDL is particularly important, as these will be more distant from users (see Figure 1).
The report identifies a number of key challenges that MDLs must address, regardless of the governance structure chosen. One of the most important issues is that of trust.Whilst MDLs are sometimes referred to as ‘trustless systems’ due to the way that transactions take place, trust is an essential component:
Theft, fraud, coding errors, regulatory compliance, the way disputes are resolved and reputational issues can all impact on users trust in an MDL. Effective governance can address these issues and enhance trust.
Ethical principles and social norms are important issues to consider in the governance of MDLs:
Managing the behaviour of users is relatively straightforward in permissioned MDLs as the users are known and identified. However, in unpermissioned MDLs, users are anonymous and this is more difficult.
Regulatory compliance is another issue that must be considered, and the issue of privacy is a good way to demonstrate this. The way privacy is handled varies considerably across jurisdictions. The “right to be forgotten” and the General Data Protection Regulations have significant implications, given the permanent and persistent nature of MDLs.
There are technical solutions available for managing regulatory compliance, however as MDLs operate across regulatory regimes, it is essential that they are adopted by all users. Ensuring that all users comply with the adoption and implementation of these will require effective governance.
With respect to state sponsored MDLs, ensuring integration of the MDL into existing governance structures is essential. A key challenge is ensuring that those responsible for oversight have both the technical knowledge necessary for running the MDL and an understanding of its strategic implications.
The key challenges faced by these types of MDL include;
Consortium MDLs also face the additional challenges of:
As private and consortium MDLs are permissioned and the users are known to the managing body, the development of service level agreements (SLAs) is the key to effective governance.Effective SLAs must:
Whilst the governing boards of private MDLs will be mapped on to the organisation which owns them, consortia have a number of options as to how the MDL can be governed.One example presents itself in the form of SWIFT, the Society for Worldwide Interbank Financial Telecommunications, a messaging network that financial institutions use to securely transmit information and instructions. SWIFT was established as a member owned cooperative and has been highly successful since it was established in the 1970s.However, in establishing a new structure to govern an MDL network care must be taken not to establish a body that evolves into the type of third party organisation that MDLs are designed to replace.
The tools for effective governance of MDLs are not that different from those used for the governance of any organisation:
Most of these will come from the standard governance handbook, however the auditing MDLs may present some challenges. Whilst researching this report, no accountancy firms were found who had conducted an audit on an MDL. However, whilst the accountants which were consulted did not foresee significant issues, a number of them did focus on the need to confirm that the assets which existed on the blockchain actually existed in the real world.
Ultimately, effective governance in MDL systems relies on people rather than software, and rests on three pillars:
A full copy of the research report 'Responsibility Without Power' can be downloaded here.