US Court Declares Lido DAO Members Legally Accountable under Partnership Rules

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As a seasoned crypto investor with over a decade of experience navigating the ever-evolving digital asset landscape, I must say that this recent court ruling has left me both intrigued and concerned. Having invested in various projects, some centralized and others decentralized, it is evident that the lines between traditional finance and the new frontier are becoming increasingly blurred.

In a recent decision, the U.S. District Court in Northern California determined that Lido DAO can be categorized as a “general partnership” according to state law. Initially, Lido DAO contested its legal status, but the court found otherwise. The reasoning behind this decision was that Lido DAO functions like a partnership, with members bearing collective accountability for its actions and profits.

Based on court papers, it’s stated that Andrew Samuels filed a class-action lawsuit in December 2023, following substantial financial losses he suffered due to a decrease in the value of the tokens he owned. He acquired LDO tokens from the secondary market via Gemini exchange between April and May 2023. After realizing his losses, he accused Lido DAO of selling him unregistered securities and claimed they were responsible for the drop in token value, leading to his lawsuit.

On Monday, the court recognized the gravity of Samuels’ assertions, deciding that Lido DAO, despite being decentralized, is still bound by regulatory obligations similar to any other financial organization. The court further stated that Lido DAO’s choice not to sell its governance tokens (LDO) directly does not exempt it from legal responsibility.

Court Questions Decentralization Claims and Investor Roles

According to Samuels’ legal team’s assertion, while Lido DAO publicly promotes the idea of decentralization, they believe that Lido DAO in reality demonstrates a centralized structure, because approximately 64% of its tokens are owned by the founders and early investors.

The case also pointed towards Paradigm, Andreessen Horowitz’s a16z, and Dragonfly Digital Management as possible key partners, implying they might have taken an active role in managing and running Lido DAO, which could make them responsible for its actions under the law. On the other hand, Robot Ventures, another investor, was not found guilty because there wasn’t enough evidence to prove their participation in Lido DAO’s decision-making or day-to-day activities.

Implications for DAOs and Crypto Industry Accountability

In response to the judge’s verdict, Miles Jennings, General Counsel and Head of Decentralization at a16z Crypto, voiced his disappointment on his X page. He argued that Judge Chhabria’s ruling represents a significant obstacle for decentralized governance. He pointed out that this decision might imply that merely taking part in a DAO, such as posting in a forum, could potentially hold members accountable for the actions of other members under general partnership laws. In his own words:

Today, a California judge significantly undermined the concept of decentralized governance. According to this ruling, merely participating in a Decentralized Autonomous Organization (DAO), such as posting on a forum, could potentially make DAO participants accountable for the actions of other members under partnership laws. Therefore, it’s crucial to be aware and prepared for potential changes in the legal landscape regarding these organizations.

In his decision, Judge Vince Chhabria expressed worries about whether people in the cryptocurrency field can dodge legal responsibility by employing unusual legal arrangements to gain profits from advanced financial tools. He underscored the conflict between the crypto sector and established legal norms, proposing that these matters need resolution within a dynamic regulatory system that adapts to changes.

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2024-11-19 17:45