ISO/TS 23635:2022

Blockchain and distributed ledger technologies - Guidelines for governance

This document provides guiding principles and a framework for the governance of DLT systems. The document also provides guidance on the fulfilment of governance, including risk and regulatory contexts, that supports the effective, efficient, and acceptable use of DLT systems.

Titre manque

General Information

• Status: Published
• Publication Date: 27-Feb-2022
• ICS: 35.030 - IT Security
• ICS: 35.240.40 - IT applications in banking
• ICS: 35.240.99 - IT applications in other fields
• Technical Committee: ISO/TC 307 - Blockchain and distributed ledger technologies
• Drafting Committee: ISO/TC 307/WG 5 - Governance
• Current Stage: 9093 - International Standard confirmed
• Start Date: 10-Oct-2025
• Completion Date: 13-Dec-2025

Overview

ISO/TS 23635:2022 - "Blockchain and distributed ledger technologies - Guidelines for governance" provides high-level guiding principles and a practical governance framework for Distributed Ledger Technology (DLT) systems. It addresses how to direct and control DLT systems by defining decision rights, accountability, incentives and governance instruments in on‑ledger and off‑ledger contexts. The technical specification also covers governance across lifecycle stages (Establish, Operate, Terminate) and within risk and regulatory contexts to support effective, efficient and acceptable use of blockchain and DLT systems.

Key topics and requirements

ISO/TS 23635:2022 organizes governance guidance around these core topics:

• Nine governance principles (summarized in the document) including: identifiers for entities, decentralized decision‑making, explicit accountability, transparency and openness, incentive alignment, performance and scalability, risk‑based decisions and compliance, security and privacy, and interoperability.
• Governance framework elements: decision rights, accountabilities, incentives, roles, and governance instruments that can be implemented on‑ledger (smart contracts, protocol rules) or off‑ledger (legal agreements, dispute mechanisms).
• DLT types and contexts: guidance tailored for permissioned vs permissionless systems, and for protocol, data, application and institutional contexts.
• Lifecycle governance: practical considerations for Establish, Operate and Terminate stages to ensure continuity, risk management and orderly transitions.
• Interoperability: governance approaches for connecting multiple DLT systems while managing shared risks and responsibilities.
• Security, privacy and regulatory alignment: emphasis on risk‑based decisions, compliance obligations and identity/accountability mechanisms for pseudonymous or institutional participants.

(The standard also references ISO 22739 for DLT vocabulary.)

Practical applications - who uses this standard

ISO/TS 23635 is intended for a broad audience involved in DLT adoption and oversight:

• Developers and architects designing governance‑aware protocols and smart contracts
• Project leads and consortiums establishing governance models for permissioned DLT networks
• Regulators, auditors and compliance teams assessing governance, risk and accountability mechanisms
• Enterprise adopters and CIOs evaluating operational, legal and interoperability requirements
• Standards bodies and academics researching governance models for decentralized systems

Adopting ISO/TS 23635 helps organizations align incentives, clarify decision‑making, and reduce legal and operational risk when deploying blockchain and distributed ledger solutions.

Related standards

• ISO 22739 - Blockchain and distributed ledger technologies - Vocabulary (referenced for terms)
• Developed by ISO/TC 307 (Blockchain and distributed ledger technologies)

Keywords: ISO/TS 23635:2022, DLT governance, blockchain governance, distributed ledger technologies, governance framework, on‑ledger, off‑ledger, decision rights, accountability, interoperability.

Standards Content (Sample)

TECHNICAL ISO/TS
SPECIFICATION 23635
First edition
2022-02
Blockchain and distributed ledger
technologies — Guidelines for
governance
Reference number
© ISO 2022
All rights reserved. Unless otherwise specified, or required in the context of its implementation, no part of this publication may
be reproduced or utilized otherwise in any form or by any means, electronic or mechanical, including photocopying, or posting on
the internet or an intranet, without prior written permission. Permission can be requested from either ISO at the address below
or ISO’s member body in the country of the requester.
ISO copyright office
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Phone: [phone]
Email: [e-mail]
Website: www.iso.org
Published in Switzerland
ii
Contents Page
Foreword .v
Introduction . vi
1 Scope . 1
2 Normative references . 1
3 Terms and definitions . 1
4 Governance principles for DLT systems . 1
4.1 Overview . 1
4.2 Principles . 2
4.2.1 Principle 1: Define identifiers of entities involved . 2
4.2.2 Principle 2: Enable decentralized decision-making . 2
4.2.3 Principle 3: Ensure explicit accountability . 2
4.2.4 Principle 4: Support transparency and openness . 2
4.2.5 Principle 5: Align incentive mechanisms with system objectives . 2
4.2.6 Principle 6: Provide performance and scalability . 2
4.2.7 Principle 7: Make risk-based decisions and address compliance obligations. 2
4.2.8 Principle 8: Ensure security and privacy . 3
4.2.9 Principle 9: Consider interoperability requirements . 3
5 Governance framework for DLT systems . 3
5.1 Overview . 3
5.2 Comparison with other governance frameworks . 3
5.3 Specific governance considerations for DLT systems . 4
5.4 Decision rights and decision-making . 7
5.5 Accountability . 7
5.6 Incentives and incentive mechanisms . 8
6 Governance of different types of DLT systems . 9
6.1 Types of DLT systems . 9
6.2 Governance in permissioned systems .12
6.3 Governance in permissionless public systems .12
7 Governance throughout a DLT system’s lifecycle and contexts .13
7.1 Governance throughout a DLT system’s lifecycle . 13
7.1.1 General .13
7.1.2 Governance in the Establish stage . 14
7.1.3 Governance in the Operate stage . 14
7.1.4 Governance in the Terminate stage . 15
7.2 Governance in the DLT systems contexts . 15
7.2.1 Overview of the DLT governance contexts . 15
7.2.2 Data context . 15
7.2.3 Protocol context . 16
7.2.4 Application context . 16
7.2.5 Institutional context . 16
8 Roles in the governance framework .16
9 Governance instruments .19
9.1 General . 19
9.2 On-ledger and off-ledger governance instruments . 20
9.2.1 General .20
9.2.2 On-ledger governance instruments . 21
9.2.3 Off-ledger governance instruments . 21
9.3 Considerations in implementing instruments. 21
9.3.1 Adaptability . 21
9.3.2 Risk . 22
9.3.3 Privacy .23
iii
10 Governance of interoperability .24
Bibliography .26
iv
Foreword
ISO (the International Organization for Standardization) is a worldwide federation of national standards
bodies (ISO member bodies). The work of preparing International Standards is normally carried out
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ISO collaborates closely with the International Electrotechnical Commission (IEC) on all matters of
electrotechnical standardization.
The procedures used to develop this document and those intended for its further maintenance are
described in the ISO/IEC Directives, Part 1. In particular, the different approval criteria needed for the
different types of ISO documents should be noted. This document was drafted in accordance with the
editorial rules of the ISO/IEC Directives, Part 2 (see www.iso.org/directives).
Attention is drawn to the possibility that some of the elements of this document may be the subject of
patent rights. ISO shall not be held responsible for identifying any or all such patent rights. Details of
any patent rights identified during the development of the document will be in the Introduction and/or
on the ISO list of patent declarations received (see www.iso.org/patents).
Any trade name used in this document is information given for the convenience of users and does not
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For an explanation of the voluntary nature of standards, the meaning of ISO specific terms and
expressions related to conformity assessment, as well as information about ISO's adherence to
the World Trade Organization (WTO) principles in the Technical Barriers to Trade (TBT), see
www.iso.org/iso/foreword.html.
This document was prepared by Technical Committee ISO/TC 307, Blockchain and distributed ledger
technologies.
Any feedback or questions on this document should be directed to the user’s national standards body. A
complete listing of these bodies can be found at www.iso.org/members.html.
v
Introduction
This document addresses how key governance characteristics such as decision rights, accountabilities,
and incentives operate effectively and efficiently in DLT systems.
Due to the fast-evolving nature of DLT systems and their adoption, this document has been developed
at a level of abstraction to provide guidance and instruction in diverse contexts. “Distributed ledger
technologies” (DLT) includes blockchain technologies. The specific blockchain technology will be
named explicitly only where specific characteristics of blockchain technologies warrant doing so.
DLT systems challenge our existing understanding of governance as these systems are often
decentralized in their governance. In the case of permissionless public distributed ledgers, they can
comprise an unrestricted number of potentially pseudonymous DLT users and nodes. Even permissioned
public blockchains can have hybrid governance structures, comprising elements of centralized as well
as decentralized governance. In the absence of a central governing authority for distributed ledger
systems, several governance questions regarding ownership, decision rights, responsibilities and
accountabilities, and incentive structures emerge that cannot be addressed by applying traditional
governance mechanisms.
Thus, for distributed ledger systems, it is important for participants to establish who they are dealing
with (identity) and who is responsible and accountable for the directing and control of the DLT system
(governance). For organizations and broader industries, it is difficult to engage in the development of
DLT systems in the absence of effective DLT-governance mechanisms.
In general, DLT systems aim for decentralizing decision rights and the technical implementation of
accountability. The locus of achieving consensus is decentralized, meaning that the records that form
the foundation of the DLT systems are not only distributed but also in many instances validated by
multiple DLT users. Moreover, disagreements can be resolved in a decentralized way if users initiate
‘forks’ by copying and branching existing codebases and developing them further according to differing
goals.
As DLT systems gain importance, incentive alignment becomes increasingly important. While incentives
are at the core of all economic activities, in DLT systems aligning incentives adequately is important
for effective functioning because in many DLT systems incentives provide the means of achieving
consensus. Unless incentives are properly aligned, the nodes of the DLT system will not contribute to
consensus. Improper incentive alignment threatens the integrity of the system and can prevent a DLT
system’s effective functioning.
Smart contracts can allow for decentralized governance mechanisms, but many present-day DLT
systems continue to be characterized by a degree of centralized, often informal, decision-making. In
DLT systems, accountability in principle will increasingly be implemented technically rather than
institutionally through traditional contracts.
Smart contracts allow for specifying and enforcing accountability using codified rules on-ledger.
However, in some cases it is not possible to implement autonomous transaction enforcement completely
on-ledger. In these cases, some form of off-ledger institutional involvement can be necessary for
effective dispute resolution among DLT users. The establishment of ‘off-ledger’ governance instruments
will be beneficial in assuring participants in the integrity of DLT systems.
Standards in these areas will also benefit DLT developers and providers looking to establish new DLT
systems that provide confidence to stakeholders. A key accountability issue concerns identity in DLT
systems, usually granted through the public addresses that are used to conduct transactions in public
DLT systems. Given multiple and pseudonymous identities, this could be a problem. Some users will
wish to identify themselves using traditional institutional means (e.g. driver licenses linked to their
DLT identities). Other technical approaches can seek to address the problem of ensuring confidence
in user identity, for example by linking reputation to public addresses. Overall, the shift toward the
enforcement of accountability through technology has only begun and it is likely that institutions will
continue to play important roles for ensuring accountability in DLT systems for some time to come.
vi
This document is organized as follows. Clause 4 presents governance principles for DLT systems.
Clause 5 discusses the governance framework for DLT systems. Clause 6 discusses the governance
of different types of DLT systems. Clause 7 the lifecycle of DLT systems. Clause 8 discusses the roles
involved in the governance of DLT systems. Clause 9 discusses governance instruments for DLT systems.
Clause 10 examines governance considerations of the interoperability of DLT systems.
The audience includes but is not limited to academics, architects, participants, users, developers,
regulators, auditors, and standards development organizations.
vii
TECHNICAL SPECIFICATION ISO/TS 23635:2022(E)
Blockchain and distributed ledger technologies —
Guidelines for governance
1 Scope
This document provides guiding principles and a framework for the governance of DLT systems.
The document also provides guidance on the fulfilment of governance, including risk and regulatory
contexts, that supports the effective, efficient, and acceptable use of DLT systems.
2 Normative references
The following documents are referred to in the text in such a way that some or all of their content
constitutes requirements of this document. For dated references, only the edition cited applies. For
undated references, the latest edition of the referenced document (including any amendments) applies.
ISO 22739, Blockchain and distributed ledger technologies — Vocabulary
3 Terms and definitions
For the purposes of this document, the terms and definitions given in ISO 22739 and the following apply.
ISO and IEC maintain terminology databases for use in standardization at the following addresses:
— ISO Online browsing platform: available at https:// www .iso .org/ obp
— IEC Electropedia: available at https:// www .electropedia .org/
3.1
distributed ledger technology governance
DLT governance
system for directing and controlling DLT systems including the distribution of on-ledger and off-ledger
decision rights, incentives, responsibilities, and accountabilities
3.2
governing body
entity that is accountable for the performance and conformance of the distributed ledger technology
governance
4 Governance principles for DLT systems
4.1 Overview
This clause sets out nine action-oriented principles for good governance of DLT systems that will be
elaborated in more detail throughout the document. The principles are intended to help stakeholders
evaluate and improve governance mechanisms, structures and activities, with a view to meet
governance objectives, which are: effective, efficient, and acceptable use of DLT systems. This is
primarily achieved by providing stakeholders with the right incentives to perform their roles within a
governance framework.
The governance of DLT systems should include commitments to address sustainability issues in their
establishment, operation, and termination.
NOTE Useful sources of information on sustainability issues are ISO 26000 and UN Sustainable Development
[15]
Goals (SDGs) .
The governance principles provide the foundation for implementing mechanisms, structures, and
activities in DLT systems. The statement of each principle refers to why it is important and what should
happen, but does not prescribe how, when or by whom the actions must be implemented, as these
aspects are dependent on the nature of the DLT systems.
4.2 Principles
4.2.1 Principle 1: Define identifiers of entities involved
DLT systems can vary in terms of the identifiers of the actors of the systems. Some DLT systems use
pseudonyms as on-ledger identifiers while others use off-ledger identifiers to provide confidence. The
definition of identifiers appropriate for the DLT system is the foundation for all governance functions.
4.2.2 Principle 2: Enable decentralized decision-making
Decentralization of decision-making is a key characteristic of many DLT systems. Decision-making
in DLT systems can either be embedded on-ledger or off-ledger. Decentralized systems foster
participation in collective decision-making, thereby enhancing overall trust. DLT systems should enable
decentralized, on-ledger decision-making processes. When decisions are made off-ledger, they should
be made in an explicit and formal manner.
4.2.3 Principle 3: Ensure explicit accountability
Over the lifecycle of DLT systems, ownership and decision-making rights can change and thus, so
does accountability. Due to the decentralized nature of most DLT systems, explicit accountability
mechanisms are needed to enforce rules. Accountability mechanisms should be enforced on-ledger
where appropriate but can be enforced or complemented by off-ledger mechanisms.
4.2.4 Principle 4: Support transparency and openness
During a DLT system’s lifecycle, the actions, decisions, and operation of the system should be
transparent to DLT stakeholders to enhance trust. DLT systems should comprise mechanisms that
allow stakeholders to observe and audit system dynamics.
4.2.5 Principle 5: Align incentive mechanisms with system objectives
Incentives in DLT systems drive the achievement of consensus among decision makers, the resolution
of conflicts and decisions on the ongoing governance, design, and operation of systems. Incentive
mechanisms in DLT systems play a key role in driving desirable behaviour across DLT users and other
stakeholder groups. Incentive mechanisms should be explicitly designed to support system objectives.
4.2.6 Principle 6: Provide performance and scalability
If performance is not provided, the agility and maintainability of the system is affected. DLT systems
should provide mechanisms to meet performance and scalability needs over the lifecycle of the
respective DLT system. The use of DLT systems should be effective, efficient, and scalable while
achieving system performance.
4.2.7 Principle 7: Make risk-based decisions and address compliance obligations
The lifecycle of a DLT system can pose specific risks, including jurisdictional challenges. Challenges
should be assessed and treated appropriately in decision-making processes. DLT systems should seek
to set rules that ultimately induce self-compliance in order to reduce the risk of non-compliance with
regulation.
4.2.8 Principle 8: Ensure security and privacy
Security serves the purpose of keeping confidentiality, integrity, and availability of the DLT system.
The DLT system should provide appropriate security mechanisms. The safeguarding of privacy in DLT
systems should be ensured. Privacy impacts should be considered. Depending on the task or process
operated on a DLT system, related requirements should be addressed accordingly.
4.2.9 Principle 9: Consider interoperability requirements
Where DLT systems will need to work together with other systems, interoperability should be
considered in the whole lifecycle of the system, especially at the design stage. A DLT system architecture
should provide mechanisms to interoperate with other DLT and non-DLT systems with similar or
different governance mechanisms in place.
5 Governance framework for DLT systems
5.1 Overview
This clause describes the governance framework for DLT systems. The framework for governance
encompasses the decision rights, accountabilities and incentives associated with the governance of DLT
systems. The differences between the governance of IT systems in general and the governance of DLT
systems are discussed.
5.2 Comparison with other governance frameworks
Traditional approaches to governance of IT, for example as described in ISO/IEC 38500 and
ISO/IEC/TR 38502, assume centralized governance. Such governance typically encompasses the
effective, efficient and acceptable use of IT within the organization and is responsible for evaluating
plans and proposals, directing policies and strategies and monitoring performance and conformance
related to IT. An organization is not necessarily a company, enterprise, or government agency, but
is assumed to be well-defined and be upheld by a clear source of authority. Boundaries on the scope
and authority of a governing body are normally documented, for example, in a constitution, charter,
or legislation. The implications of organizationally bound IT governance flow through elements and
assumptions of these existing governance frameworks. These are commonly reflected in the role of
conventional IT governance frameworks in defining and ensuring the implementation of IT strategy and
business plans, the accountabilities of organizational management and boards, and the management of
organizational risks including their relevant control treatments.
DLT systems differ from IT systems in general in that they involve distributed computing and are
decentralized systems, where different nodes of the system are typically controlled by different
organizations or individuals. In the context of governance, only organizations and individuals are
considered as accountable entities. DLT systems can span organizational and jurisdictional boundaries.
As a result, governance can span multiple organizations or individuals and therefore goes beyond the
governance approaches of International Standards such as ISO/IEC 38500 and ISO/IEC/TR 38502. The
relationship between the organizations and individuals involved with the DLT system is key and the
governance framework for the system needs to address a series of critical questions such as:
a) What are the different types of DLT systems and how do they affect the establishment and execution
of governance rules?
b) How do changes of the governing body over the lifecycle of DLT systems affect different DLT
governance contexts?
c) Which stakeholder roles exist and how do they affect DLT systems governance?
d) How can risk, accountability, and compliance considerations be embedded in different types of DLT
systems?
e) How can interoperability between DLT systems as well as between DLT systems and non-DLT
systems be achieved and what are the governance implications?
To achieve effective governance of decision rights, accountabilities, and incentives, DLT systems
governance should accommodate for multi-stakeholder, distributed governance, reflecting the
decentralization typical of DLT systems.
5.3 Specific governance considerations for DLT systems
Governance of IT is defined by ISO/IEC 38500 as ‘a system by which the current and future use of IT
is directed and controlled’. ISO/IEC 38500 covers many of the aspects of governance that also apply to
DLT systems.
There are certain characteristics and dependencies of DLT systems that require a different approach
to governance of IT as described in ISO/IEC 38500. While the governance of IT systems of a centralized
organization is a relatively mature field, the governance of decentralized systems such as DLT systems
is less well understood. This document addresses the unique aspects of governing DLT systems that
warrant the adoption of specific governance functions and characteristics.
Governance of IT as defined in ISO/IEC 38500 addresses responsibilities and accountability. Another
definition for governance of IT is given in Reference [17]: ‘IT governance represents the framework for
decision rights and accountabilities to encourage desirable behavior in the use of IT’. This definition
encompasses three key dimensions of governance of IT: decision rights, accountability, and incentives.
These dimensions are useful when considering decentralized systems that span across multiple
organizations.
The essence of a decentralized system such as a DLT system is that the system is typically decentralized
among a group of organizations or individuals. The governance of such decentralized systems is closely
connected to the nature of the group and the means by which the group is bound together.
There are three types of DLT systems with different governance structures and associated processes
according to their degree of decentralization. While permissionless public DLT systems are considered
to be completely decentralized, DLT systems that are permissioned public or permissioned private
share attributes of centralization, see Table 2. For example, the governing body of permissionless public
systems can be a decentralized group of pseudonymous stakeholders without any explicitly declared
organizational hierarchy. In contrast, the governing body in a permissioned public system can be one
or more entities clearly identifiable and verified. Different forms of governance implementations in
permissioned public DLT systems are imaginable, such as cooperatives, oligarchies, or associations
that can have membership voting mechanisms to elect representatives or appoint decision makers with
tenure limited to a fixed period.
The key dimensions of DLT governance are described in more detail in Table 1, based on a definition
provided in Reference [18].
Table 1 — Governance dimensions of DLT systems
DLT systems governance
Decision rights a) The allocation of decision rights in a decentralized environment can be less
apparent and explicit than in traditional centrally governed environments. DLT
users and other stakeholders affected by DLT governance decisions are impacted
by how these decision rights are allocated.
b) Decision rights can be defined on-ledger or off-ledger, and explicitly or implicitly.
Implicit decision rights provide flexibility but are less easily scrutinized. Explicit
decision rights are embedded within the DLT system design itself or defined by
external reference.
c) Where decision rights are explicitly embedded within the DLT system design
itself, the application of such governance is enforced by technology, having less
reliance on institutional enactment for its operation.
d) The allocation and explicitness of DLT system decision rights can evolve through
the lifecycle of a DLT system. For example, they can start as implicitly centralized
and evolve to explicitly decentralized as the DLT system matures.
e) Decisions can be achieved through off-ledger or on-ledger consensus or through
external rules made by stakeholders involved in the DLT system.
f) Forking is the ability for stakeholders to separate a new code base of a DLT
system in order to establish a new DLT system with different governance
mechanisms or rules. While it represents an existential separation of a DLT
system and therefore reflects a drastic governance separation, its availability as
an option also serves as a motivation for stakeholders to achieve a consensus on
otherwise contentious governance decisions.
g) Decision rights can evolve over the lifecycle of a DLT system. For instance, they
can be centralized and exercised initially by a small group and then expanded to
a wider or different group of stakeholders.
Accountability a) Accountability is based on identifiability of DLT participants, who bear
ownership of specific outcomes and decisions.
b) Accountability is specified in the network and delegated to and by the DLT
system.
Incentives a) Incentives in DLT systems play a key role in driving behaviour across diverse
DLT participants and other stakeholders.
b) Incentives encourage the execution of activities necessary for the ongoing
operation and governance of the system.
c) If incentives for participants and other stakeholders are misaligned, they
can lead to behaviours that ultimately are to the longer-term detriment of
participants or stakeholders, potentially jeopardizing the operation of the
system.
d) Incentives in DLT systems drive the achievement of consensus among decision
makers, the resolution of conflicts and the taking of decisions regarding the
ongoing governance, design, and operation of systems.
DLT users are not necessarily bound by existing organizational relationships, nor are they necessarily
constrained by common contracts, commercial agreements or even jurisdictions. Governing such
systems requires specific adaptations to accommodate for the potential lack of typical governance
mechanisms and conventional sources of decision-making authority and accountabilities.
DLT users and other stakeholders organized in a decentralized or polycentric system will benefit from
clearly specified decision-making rules, accountabilities, and incentive structures at each DLT systems
lifecycle stage.
The nature of governance of DLT systems will also depend on the level at which the system will be
governed, see Figure 1.
Figure 1 — Levels of DLT systems governance
For Level I, DLT Consensus Mechanism Governance, choosing a certain consensus mechanism, such as
proof of work, proof of stake, or proof of authority, defines subsequent decision rights and incentives
and thus determines the overall governance.
For Level II, DLT System Governance, governance of DLT systems is achieved through the application
of on-ledger technically enacted governance mechanisms or through off-ledger governance that relies
on supporting, sometimes implicit decision-making processes, accountabilities, and incentives. Level II
governance dictates how DLT system decisions are made and how potential conflicts are resolved. On-
ledger governance dictates that codified DLT governance rules will determine which participants are
allowed to participate in such decisions, how disputes are resolved, and how voting mechanisms work
to achieve acceptable consensus for specific decisions.
For Level III, DLT Interoperability Governance, inter-system governance, ensures the interoperability of
DLT systems with other systems and broader non-DLT contexts.
In the context of DLT governance, it is necessary to distinguish between governance of DLT systems and
governance through DLT systems.
a) Governance of DLT systems
Governance of DLT systems follows the logic of other socio-technical standards, that perceive
technologies such as DLT systems as an operating object that need to be governed. This document
largely follows that logic in developing guidelines for governance of DLT system for level II and III
as illustrated in Figure 1. Following that view, the source of control ultimately resides outside the
DLT system and a governance regime is enforced on it.
b) Governance through DLT systems
Governance through DLT systems follows the logic of algorithmic governance or approaches it
from a techno-social perspective. Technologies such as DLT systems are perceived as an operating
agent that is exercising governance. In Figure 1, once a consensus mechanism has been chosen and
implemented, the algorithmic governance regime that comes with the consensus mechanism in
level I governance is enforcing or dictating subsequent decisions and behaviours. Following that
view, the source of control resides inside the DLT system and a governance regime is enforced
through it.
While it is assumed that the notion of governance through DLT systems, sometimes referred to as
algorithmic governance, is increasing in importance with the emergence of autonomous systems and
machine to machine interaction, this document adopts a socio-technical view rather than a techno-
social view of DLT governance, with the source of control residing with human beings and legal entities
rather than with technical entities.
Clarification of the source of control and authority in DLT systems is a key requirement for effective
governance. This is particularly important due to the potential absence or otherwise diminished
presence of decision-making authorities assuring the integrity of recorded transactions in these
systems.
The decentralized nature of DLT systems can lead to reduced clarity of ownership of rights among
DLT participants compared to more conventional, centralized systems (e.g. C-level management,
shareholders, boards). Those who actively engage in governing DLT systems can therefore pay more
attention to their needs as users rather than as owners of rights relevant to such decentralized systems.
5.4 Decision rights and decision-making
Decision-making is a key attribute of the governance of systems. The governance of DLT systems
involves decisions such as decisions to fork, decisions on consensus rules that determine the on-ledger
operation of systems, and decisions on the rights of diverse participants and how conflicts among them
will be addressed.
DLT decision-making can take place on-ledger or off-ledger. When on-ledger, the decisions are governed
by rules encompassing the decision rights and accountabilities embedded within the DLT system
and executed accordingly. When off-ledger, decisions and authorities involve the application of either
implicit or explicit governing rules, also encompassing decision-making rights and authorities. Implicit
off-ledger governance has the disadvantage of not being as transparent to participants, while having
the advantage of better protecting against risks and challenges not potentially foreseen by the on-
ledger governance rules embedded within a DLT system.
Decentralized decision-making requires certain elements, techniques, and processes to be in place
which differ from decision-making in centralized systems. A key characteristic of the decentralized
decision-making relating to DLT systems is the use of consensus rules to arrive at decisions. Consensus
rules articulate the criteria by which a decision will be approved into enforceability for participants
in a DLT system. Consensus rules can take different forms. When embodied on-ledger, the DLT system
itself provides the mechanisms for which decisions are formulated, defined, discussed, voted on and
applied into operation. When off-ledger, other mechanisms such as legally binding obligations on
specific participants are required to render decisions binding and operational in the DLT system.
5.5 Accountability
To increase transparency for current and future DLT users and other stakeholders, the responsibilities
and accountabilities of parties within DLT systems should be declared and made explicit. This enables
participants to understand how and where authority rests and reduces uncertainty for both DLT users
and other stakeholders in assessing risks in relation to the operation of distributed ledger systems.
DLT systems that do not explicitly allocate accountability and responsibility for decisions include
challenges that formalized legitimate decision-making authorities would avoid.
Without the declaration of location of authority for key operational and governance decisions, parties
who do hold such control, often do so without formalized accountability, rendering participants unable
to have even limited recourse to oversight and regulatory constraints in the event of governance failures.
Examples include abuses of power, misappropriation of systemic assets, or decisions that do not align
with the interests of significant proportions of DLT users. This presents challenges to stakeholders
of DLT systems, leaving them with limited recourse to hold decision-makers with implicit authority
accountable over DLT systems for decisions that go against the rules, principles or conventions of a DLT
system, or the general interests of DLT users and other stakeholders.
DLT-based smart contracts and human-independent organizations also present accountability
challenges. The novel nature of these capabilities presents challenges to conventional controls that
regulators and governing authorities use to regulate the activities of individuals and organizations
to minimize systemic risks. Such control is typically levered on institutions and their executives over
whom regulators and governing authorities exert authority over behaviour through the issuance of
operating licences and the power to issue legal sanctions and penalties. When these control points
are displaced by autonomous, decentralized governing entities, the resulting accountability vacuum
challenges regulatory objectives and it is necessary to define underlying orchestration entities to
support accountability within the uncertainty.
Smart contracts in distributed ledger system contexts allow unknown parties to transact with reduced
risk of fraud and costs of third-party enforcement. In this manner, smart contracts provide an efficient
means of addressing the costs and uncertainties associated with counterparty risks. Smart contracts
conversely introduce key governance challenges in the form of uncertainty of their compliance with
existing legal and regulatory frameworks and present challenges in enforcing legal rulings and
sanctions as a consequence of their illegitimate or illegal operation. The logic that determines the
actions of a smart contract, is embedded in its source code. Lack of visibility of this code can add further
uncertainty to the allocation of accountabilities for these systems.
To address these challenges posed in DLT systems:
1) DLT providers should make visible to stakeholders the distribution of accountabilities for DLT
systems. Ideally these accountabilities will be visible on-ledger. An alternative will be for off-ledger
publication of accountabilities which is explicitly referenced on-ledger.
2) DLT providers should make their reporting on DLT systems available for independent auditing.
3) DLT providers should make DLT software code and documentation available to regulators or
include resolvable mechanisms.
4) DLT systems should establish a dispute resolution mechanism for DLT participants, providers and
broader stakeholders.
5.6 Incentives and incentive mechanisms
DLT systems present the risk of incentive asymmetries among stakeholder groups such as DLT users,
DLT providers, and DLT developers. Incentive asymmetries can lead to system exploitation and
economic and other imbalances among participants in a DLT system, ultimately leading to system
failure.
DLT system incentives refer to any system design element that can influence the behaviour of
participants. DLT system incentives can take a range of forms, from assurance of compliance with
legal obligations to user-functionalities or economic incentives. Incentives can also take the form of
encouragements for DLT participants and stakeholders to not behave in certain ways. These serve to
discourage participants from actions that can adversely impact the longevity of the overall system or
specific classes of participants.
DLT incentive mechanisms refer to specific implementations of incentives in DLT systems. On-ledger
DLT incentive mechanisms manifest incentives into DLT systems using specific DLT constructs,
including mathematical models in social science and computer science such
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