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Judge Vince Chhabria, in his ruling, raised concerns about whether individuals in the cryptocurrency industry can avoid legal accountability by using unconventional legal structures to profit from innovative financial instruments.
Key Notes
A US court ruled Lido DAO operates as a general partnership, making members jointly responsible for its actions.Andrew Samuels sued after incurring losses, alleging LDO tokens were unregistered securities.64% of tokens are held by founders and early investors.The US District Court for the Northern District of California has ruled that Lido DAO can be legally classified as a “general partnership” under state law. The organization had initially argued that it was not a legal entity. However, the court disagreed, concluding that it operates as a partnership, where members share joint responsibility for its actions and profits.
According to court documents, Andrew Samuels filed a lawsuit in December after incurring significant losses due to a decline in the token’s value. Samuels purchased LDO tokens on the secondary market in April and May 2023 through the Gemini exchange. Following his losses, he filed a class-action lawsuit, claiming the tokens sold to him were unregistered securities and holding Lido DAO liable for their drop in value.
On Monday, the court acknowledged the seriousness of Samuels’ claims, ruling that Lido DAO, despite being decentralized, remains subject to regulatory requirements like any other financial entity. The court also determined that Lido DAO’s failure to directly sell its governance tokens (LDO) does not shield it from legal liability.
Court Questions Decentralization Claims and Investor Roles
In one of the claims by Samuels’ legal team, they argued that Lido DAO, despite Lido DAO’s public stance on decentralization, it actually exhibits centralized control, as 64% of its tokens are held by founders and early investors.
The case also implicated Paradigm, Andreessen Horowitz’s a16z, and Dragonfly Digital Management as potential general partners, with the court suggesting they may have actively participated in Lido DAO’s governance and operations, potentially making them legally accountable for its actions. However, Robot Ventures, another investor, was not held liable due to insufficient evidence of its involvement in Lido DAO’s governance or operations.
Implications for DAOs and Crypto Industry Accountability
Reacting to the judge’s ruling, General Counsel and Head of Decentralization at a16z Crypto, Miles Jennings, took to his X page to express his dissatisfaction with the judgment. He stated that Judge Chhabria’s verdict is a big setback to decentralized governance. He noted that based on the decision, participating in a DAO, even through minimal actions like posting in a forum, could be enough to make members legally responsible for the actions of other members under general partnership laws. He said:
“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.”
Judge Vince Chhabria, in his ruling, raised concerns about whether individuals in the cryptocurrency industry can avoid legal accountability by using unconventional legal structures to profit from innovative financial instruments. He emphasized the tension between the crypto industry and traditional legal principles, suggesting these issues must be addressed within an evolving regulatory framework.
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Temitope is a writer with more than four years of experience writing across various niches. He has a special interest in the fintech and blockchain spaces and enjoy writing articles in those areas. He holds bachelor's and master's degrees in linguistics. When not writing, he trades forex and plays video games.
