The voting results of the proposal show that there is overwhelming support in the community for improved transparency and the adoption of an understood policy with regard to ownership, control and financing; however recent developments have shown that the questions proposed under the Assessment of Independence section fall short of providing a clear policy that will reliably define independence of node providers.
Leo, Enzo and David have provided us with a timely case study. One thing that is striking about the current situation is that even though the questions to assess independence have just been presented in the proposal we do not seem to have clarity about whether the new node provider ownership arrangement that has been presented by Leo in his post here would be assessed as independent or not.
Ambiguity lies in whether BlueAnt LLC would be required to disclose David as having decision-making authority over its parent company which, according to our questions, is not dependent on percentage ownership. To indicate that he does not would be nonsense, particularly given that he would likely be providing the funding in this relationship and that he is a board member of Sisyphus AG as disclosed by Leo in his post referenced above.
It has been clarified that decision-making authority of a parent company needs to be disclosed in answer to Question 1:
The implication here is that to avoid being clustered Blue Ant LLC would not be including David in its disclosures. This illustrates that the questions as currently written may incentivise the artificial removal or withholding of management titles and official positions such as board membership to avoid disclosure. This is not contributing to the transparency that we’re aiming for.
I believe that the proposed arrangement with Sisyphus AG would not satisfy our expectations of independence. One aspect of this situation that sits very uncomfortably with me and others in the community is the cross-ownership of node providers. If this situation were allowed without clustering then this would provide a green light for any node provider who has the maximum allocation of nodes to effectively acquire more under an equity arrangement with another node provider.
Let me illustrate what this precedent would allow:
I could create five new companies with five different associates listed as the UBOs and these companies could become node providers (I know enough technically competent people who could maintain IC nodes without my assistance). I could then create five new companies in which I hold a 20% share in return for my invested capital. These five new companies purchase the existing node provider entities, disclosing the same UBOs as their respective node provider entities. Under this arrangement I would have potentially doubled my revenue, I would have full or partial ownership of up to six times the allowable nodes and my name would only be required to be disclosed for my original node provider entity.
I could also create a new company with two, three or four other people. Our company owns their node provider entity. I retain 20% of the parent company. Same scenario as above. Same scenario as the Sisyphus AG proposition.
It may be even easier; I could just take a direct 20% share of my associates’ node provider entities (and however many other node provider entities that are open to a capital injection).
I have absolutely nothing against Leo, Enzo and David and I appreciate their contribution to the IC. I just don’t like the precedent that this sets. It seems that there are simpler, compliant solutions to their situation as posed here, assuming some leniency is extended to give them time to repay the loans to David.
Question 5 makes it clear that debt financing of any amount is not condoned between node providers and would result in clustering. I would propose that funding through equity / ownership be restricted the same way. Maybe this could be achieved by modifying Question 2 to:
- Q2: Overlap with Other Node Providers
- Is any direct or indirect owner, UBO or person exercising effective control of this node provider also a direct or indirect owner, UBO or person exercising effective control of another node provider?
- If yes, provide the legal name(s) of the person and the other node provider(s).
Question 2 must also make it clear whether the legal names provided are to be disclosed publicly or privately to an auditor. As currently written Question 2 will lead to different interpretations with respect to disclosure requirements.
Node providers could request an exemption from this requirement. I would suggest that an exemption would be appropriate for Dfinity and for very large node provider entities. The rationale for this is that node provision is such a very small part of what large entities do. For example, Sygnum Bank is now a $1B business. A small share holding in an entity this size has very little to do with node provision. In Sygnum’s case if there are no longer any owners with at least 25% ownership then they would only need to disclose their board members and senior management team.