Digital Sovereignty and the Cloud Wars: Infrastructure as Power

DigitalRegulation #44

Welcome to the latest edition of the #DigitalRegulation, where we explore the intersection of technology, regulation, and policy, with a touch of geopolitics for extra flavor. We explore how tech companies, often unintentionally, are stepping into roles once reserved for governments. From digital platforms acting as rule-makers to private infrastructures enabling governance without government, we’re diving into the blurring of the public-private frontier

Published every Thursday, this series unpacks the shifting role of tech companies in governance and regulation, shedding light on the evolving relationship between the public and private sectors.

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DAOs: Decentralization Meets Jurisdiction

Decentralized Autonomous Organizations (DAOs) are often seen as a radical experiment in governance, but they are, in essence, modern cooperatives. Cooperatives are one of the oldest forms of collective organization, with over a billion people around the world using them as their primary collaboration and social operating system. While DAOs may appear new to urban elites who have traditionally viewed human collaboration through the lens of state or market systems, they are simply a contemporary expression of cooperative principles, utilizing smart contracts and token-weighted voting to manage shared resources and decisions

To operate in the real world—hire employees, open bank accounts, or interact with traditional legal systems—DAOs need legal wrappers. Increasingly, jurisdictions like the United Arab Emirates, Cayman Islands, and Wyoming have begun offering formal legal structures tailored to DAOs, enabling them to exist as registered entities.

But this comes with trade-offs. As jurisdictions like the Cayman Islands, the UAE, and Wyoming compete to attract DAO activity, many are offering streamlined legal structures with minimal regulatory overhead. While this can lower barriers to innovation and encourage experimentation, it also invites comparisons to the "flag of convenience" model from maritime law—raising open questions about oversight, legal accountability, and the long-term consequences of jurisdictional competition.

At the same time, regulators like the Abu Dhabi Global Market (ADGM) are experimenting with structured regulatory sandboxes that allow DAOs to innovate under watchful regulatory conditions. This dual movement—towards both deregulation and regulatory experimentation—embodies the ambiguity of exporting governance.

Special Zones and Tech-Driven Jurisdictional Experiments

The concept of Special Economic Zones (SEZs) isn’t new—but what we’re seeing now is a digital reinvention of that model. Zones like Prospera in Honduras, Crypto Valley in Zug, Switzerland, and Dubai’s Virtual Assets Regulatory Authority (VARA) are not just offering tax benefits or startup-friendly legislation. They are offering entire regulatory frameworks optimized for digital governance.

These “Special Digital Economic Zones” function as testbeds for alternative governance models, often featuring bespoke arbitration systems, private dispute resolution mechanisms, and a blend of public-private rulemaking. In some cases, the line between centralized national state governance, corporate platform governance, and network-based governance blurs entirely

This creates a kind of "Governance-as-a-Service" model: companies and communities can choose from a menu of governance structures, legal systems, and compliance regimes—often without the political negotiation or democratic accountability we expect in traditional states.

Code is Law: Software as a Regulatory Tool

Underpinning all of this is the rise of code as a form of public policy. As Lawrence Lessig famously argued, in digital environments, “code is law.” Smart contracts embedded in DAOs or blockchain protocols effectively enforce rules automatically, without needing courts, police, or political consensus.

This can be incredibly efficient—code doesn’t forget, doesn’t discriminate, and executes instantly. But code is made by people, which do all those three. Code it also removes the flexibility and nuance of human governance. Errors in code, manipulation of voting systems, or the concentration of governance tokens can result in opaque power structures with no clear paths to recourse.

Moreover, code-based systems are often extraterritorial. They are not limited by borders, making it difficult for national regulators to enforce local laws—whether on data protection, labor rights, or financial disclosure. This raises deep concerns about accountability, transparency, and equity in digital commons governance.

🌐 On the Radar

Donald Trump plans to host his controversial military parade this Saturday | The verge

Nonprofit America250 Foundation is helping support some of the festivities along the route. That foundation has quite a few sponsors in Big Tech.

Walmart and Amazon Are Exploring Issuing Their Own Stablecoins | The Wall Street Journal

Retail giants including Walmart and Amazon are said to be considering issuing their own USD-pegged stablecoins, complete with their own branding, the Wall Street Journal reports. The speculation is that this move would take billions away from banks as these companies could move to stablecoin-based payment systems

Innovation or Regulatory Arbitrage?

The creation of DAOs and digital economic zones opens the door to innovation—but also to regulatory arbitrage. Entities can shop jurisdictions, forum-select legal norms, and exploit gaps in international coordination.

But how can you accuse an individual or a company of wanting less or cheaper bureaucracy? The emergence of DAOs and digital economic zones invites innovation—and, naturally, incentives to optimize for efficiency. Entities may seek out jurisdictions with clearer rules, lower compliance costs, faster processes, and stronger community support, along with more competitive digital public infrastructure. While this can be a rational response to bureaucratic friction, it also reflects a different approach to risk. Residents and businesses can reclaim their agency by choosing the level of public and regulatory risk they are willing to take. In some jurisdictions (e.g. Prospera), companies operating in regulated industries can even subscribe to regulatory insurance, covering potential damages.

This dynamic is visible in disputes over DAO liability, KYC/AML compliance, and cross-border enforcement of smart contracts. Regulators around the world—from the SEC to the European Commission—are beginning to grapple with how to apply traditional legal principles to borderless, algorithmic organizations.

What emerges is a tension: on one hand, the promise of global Commons and participatory governance through DAOs. On the other hand, the risk that fragmented sovereignty and legal asymmetries will undermine the public interest, concentrating power in the hands of technical elites or compliant jurisdictions.

Why It Matters

We are entering an era where governance is no longer solely the domain of nation-states. It can be exported, outsourced, embedded in code, and even monetized. This raises profound questions for the future of democracy, sovereignty, and public accountability.

As governments struggle to catch up, the challenge is not just about regulating new technologies—but about redefining governance in a world where power flows through protocols, not parliaments.

Whether DAOs will live up to their promise of creating fairer, more participatory systems—or simply become new instruments of exclusion—depends on how we build legal bridges between digital innovation and democratic principles.

Now is the time to ask: Can we build global governance that is open, interoperable, and accountable—or will we watch as power consolidates in digital enclaves beyond the reach of public oversight?

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