Lido DAO Members Exposed to Liability, California Court Rules

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As a seasoned crypto investor with over a decade of experience navigating the tumultuous waters of digital assets, I find myself both intrigued and concerned by this recent court ruling on Lido DAO. The decentralized governance model has always been one of the most appealing aspects of blockchain technology, offering an alternative to traditional, centralized systems. However, it seems that even the most autonomous entities can’t escape the long arm of the law.

In a decision made by a California court, individuals involved with the Lido Decentralized Autonomous Organization (DAO) may now face liability based on the state’s partnership regulations.

The focus of this case is on the decentralized administrative entity supporting the well-known liquid staking protocol (LSP). However, this ruling sets a major precedent that carries substantial consequences for the future of decentralized governance.

Court Rules Lido DAO Members Liable Under Partnership Laws

In April and May of 2023, Andrew Samuels acquired Lido’s LDO tokens from the secondary market through the Gemini exchange. Later in December, he initiated a class-action lawsuit, claiming that these tokens were sold as unregistered securities. He attributed his financial losses to the decreasing value of these tokens and held the DAO responsible for his predicament.

In his objection, Samuels contended that the DAO encouraged token transactions on various platforms, potentially breaching securities regulations. The judge agreed with him, stating that the DAO’s construction and actions made it liable under general partnership rules.

According to the court’s interpretation, the term ‘offers or sells’ includes invitations to buy securities. The court found that Samuels made a convincing argument that Lido DAO invited these purchases, which makes them accountable for their actions.

On Monday, Judge Vince Chhabria of the US Northern District Court of California denied Lido DAO’s argument that it functions outside of conventional legal entities, immune to traditional laws. Instead, the court deemed Lido DAO a general partnership, making its participants responsible for overseeing its operations and bearing its responsibilities.

In summary, the judge clearly pointed out some key players, such as Paradigm Operations, Andreessen Horowitz (a16z), and Dragonfly Digital Management. According to the decision, these venture capital firms have been recognized as general partners because they’ve played an active role in managing and governing Lido DAO. On the other hand, Robot Ventures was excluded from the lawsuit since there wasn’t enough proof showing their direct involvement.

The court’s ruling signifies a crucial step in how decentralized autonomous organizations (DAOs) are handled legally. It’s important to mention that DAOs were created to function without a central authority. Interestingly, the court determined that Lido DAO’s structure—where token holders make decisions and receive staking returns—aligns with California’s definition of a partnership.

“[This case] raises critical questions about the ability of individuals in the crypto ecosystem to shield themselves from liability through novel legal arrangements tied to decentralized financial instruments,” judge Chhabria wrote in his ruling. 

This ruling implies that simply being connected to a Decentralized Autonomous Organization (DAO) might not automatically lead to accountability. What’s necessary is an active role in decision-making or the functioning of the organization.

Reaction from the Crypto Community

The ruling has sparked concern across the crypto and blockchain community. Miles Jennings, General Counsel and Head of Decentralization at a16z crypto, described the decision as a severe setback for decentralized governance. 

In his statement on X (previously known as Twitter), Jennings explained that, according to this regulation, simply engaging with a Decentralized Autonomous Organization (DAO), such as participating in a forum discussion, could potentially make DAO members responsible for the actions of other members under general partnership laws.

The decision highlights the risks for participants in DAOs, particularly those involved in governance or decision-making processes. 

By deciding that a Decentralized Autonomous Organization (DAO) doesn’t automatically protect its members from legal responsibility, the court has established a precedent that may influence similar DAOs and their contributors in the future. The decision highlighted that a partnership can be considered general, regardless of whether it was intentionally formed or not, as long as two or more people collaborate to jointly manage and profit from a business venture.

This case has far-reaching implications for the crypto industry, particularly for decentralized projects that rely on token-based governance models. Moving forward, DAOs may need to rethink their structures and establish legal entities to protect participants from similar liability risks. 

According to the Chief Apostle of RWA, every Decentralized Autonomous Organization (DAO) will typically need a legal framework, thoughtful selection of jurisdiction, and adherence to security token issuance regulations unless there is a change in the law.

This choice implies a tough journey lies ahead for Lido DAO and its members, navigating the complex landscape of laws and regulations. Simultaneously, other DAOs and decentralized initiatives might experience heightened examination as authorities and courts evaluate their activities in light of existing legal structures.

Lido DAO’s LDO token is down almost 2% on this news. As of this writing, it is trading at $1.18.

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2024-11-19 19:09