Emily Walker
The landscape of cryptocurrency is changing swiftly as adoption increases and regulatory measures evolve, leading legal decisions to adapt accordingly.
Recently, a federal judge in the United States has ruled that individuals involved in decentralized autonomous organizations (DAOs) could be held accountable for the actions of their peers based on California’s partnership laws.
Judge Vince Chhabria of the US District Court for Northern California determined that the body governing Lido DAO is classified as a general partnership per state regulation.
This judgment is significant for the decentralized finance (DeFi) field, as it could render DAO members liable for the organization’s dealings.
Detailed Overview of the Legal Effects on Lido DAO and Its Members
The case was initiated by investor Andrew Samuels, who claimed that after purchasing tokens from Lido DAO, he suffered financial losses because the DAO did not register its tokens as securities with the US Securities and Exchange Commission (SEC).
Samuels aimed to hold Lido DAO and its known partners accountable under Section 12(a)(1) of the Securities Act, allowing buyers to pursue sellers for offering unregistered securities.
Judge Chhabria concluded that Samuels had “adequately alleged” that Lido DAO and its known partners could not evade legal responsibility.
The court’s finding that Lido DAO qualifies as a general partnership means its partners are accountable for the DAO’s actions.
This ruling outlines a new framework for regulating crypto DAOs, which rely on decentralized management, using existing partnership laws.
Samuels pointed out four major institutional investors—Paradigm Operations, Andreessen Horowitz, Dragonfly Digital Management, and Robot Ventures—as alleged partners in Lido DAO.
He accused these firms of having significant roles in managing Lido DAO, thus taking on responsibilities akin to partnership, which could lead to liability for the DAO’s conduct. In response, all four firms attempted to have the lawsuit dismissed.
Only Robot Ventures successfully had their motion to dismiss accepted, as the court found insufficient evidence to classify it as a general partner.
In contrast, the judge declined to dismiss the cases against Paradigm, Andreessen Horowitz, and Dragonfly, arguing their involvement in Lido DAO’s governance was enough to categorize them as general partners under state law.
Responses from the Cryptocurrency Sphere
This ruling has sparked extensive discussion within the crypto and DeFi sectors. Analysts suggest that this new legal precedent might lead to “greater liability” for individuals involved in DAOs, which could hinder decentralized governance.
For example, Miles Jennings, legal advisor and decentralization head at a16z Crypto, has shared his perspective on the repercussions of this court ruling.
Jennings highlighted that even minimal participation, like commenting in a DAO’s forum, could now subject members to liability under California’s partnership regulations. This scenario poses a critical risk to decentralized governance and emphasizes the need for clearer legal standards.
Today, a California judge dealt a huge blow to decentralized governance.
Under the ruling, any DAO participation (even posting in a forum) could be sufficient to hold DAO members liable for the actions of other members under general partnership laws.
It’s time to DUNA. pic.twitter.com/aKNBY7pfc9
— miles jennings (@milesjennings) November 19, 2024
Image crafted using DALL-E, Chart sourced from TradingView