Judge Rules Decentralized Autonomous Organizations Arent So Decentralized in the Eyes of the Law
The cryptocurrency industry has long been fueled by a libertarian ethos that sees government oversight and regulatory scrutiny as the enemy of economic freedom. At the same time, it is also an industry that has sought to reproduce goods and services that already exist in the traditional, regulated economy. In theory, the end result of this setup is a marketplace ungoverned by the traditional strictures (or, more accurately, guardrails) of modern economies. In practice, it means that crypto organizations often flout financial laws, only to then claim that the law does not (or should not) apply to them. This week, the Lido DAO, one of web3s largest decentralized autonomous organizations, suffered a legal blow in a litigation case that has sought to clarify yet another one of cryptos many legal gray areas. Lido is currently being sued in a class-action lawsuit that accuses it of having sold unregistered securities. An LLC representing the DAO has leaned heavily into web3s notion of decentralization, in an effort to get Lido and its associates off the hook. Dolphin CL, LLC, which represents Lido, has made the claim that the organization is just software and does not represent a legal entity and, therefore, cannot be held liable for its action, court documents claim. However, a federal judge shot down that argument this week, maintaining that Lido is, indeed, a legal entity and, therefore, must be subject to the same laws and regulations. Judge Vince Chhabria found that, under California law, Lido represents a general partnership and is therefore subject to the same regulations that such arrangements are beholden to. He also found that those organizations deemed Lidos institutional investorsthat is, the large companies that fronted much of its money and managed its operationsshould be deemed members of that partnership and, therefore, held liable. Those companies include investment firm Paradigm Operations, well-known venture capital firm Andreessen Horowitz, and investment firm Dragonfly Digital Management. A fourth firm, Robot Ventures, was excluded as a partner.The severe weirdness of Lidos legal defense strategy should be noted. Dolphin CL, LLC, is a new company that was formed in July, at the behest of Lidos investors, to respond to the litigation against it, Bloomberg reports. Dolphin, itself, is represented by a law firm, Brown Rudnick LLP, the outlet writes. Again, Dolphin has argued that Lido is just an algorithmically run program and, therefore, cannot be held liable for whatever happened to people who lost money on its crypto tokens. In his ruling, Chhabria seemed to highlight the crypto industrys ongoing attempt to elude legal definition (and, therefore, culpability), writing that [the lawsuit brought against Lido] presents several new and important questions about the ability of people in the crypto world to inoculate themselves from liability by creating novel legal arrangements to profit from exotic financial instruments.Much mystification has gone into what the crypto industry is and does. DAOs, which have been referred to by their proponents as revolutionary governance models in corporate decision-making, have more in common with traditional corporations than their stans want to let on. Like the rest of crypto, their proponents claim that their decentralized status entitles them to operate outside the bounds of traditional financial regulation and legal scrutiny. That seems to work fine until a situation like this, where everybody gets dragged into court and web3s hifalutin, amorphous terminology suddenly needs to be firmly and consistently nailed down. The Lido case revolves around another such legalistic quandary. Lido is being sued by the plaintiff, a man named Andrew Samuels, on the basis that it sold unregistered securities. Samuels bought LDO, Lidos tokens, and subsequently lost money on that investment. Now, as a litigant, Samuels accuses Lidos founders of having set up the DAO with the explicit goal of avoiding regulatory scrutiny for its fundamentally illegal business. However, Lido has maintained that it is not selling securities at all.This debate is, in many ways, the debate, when it comes to the crypto industry. For years, web3 benefited from transacting in uncharted regulatory territory. As the industry has grown larger and more influential, however, scrutiny of its activity has grown. Today, whether assets represent a security or a commodity is an increasingly intensifying debate. Securities are considered financial instruments that often represent a stake in a particular company, while commodities are goods that have a particular investment value. Crypto proponents have argued that they are not selling securities and, thus, are not beholden to the financial laws and regulations that govern traditional stocks. By contrast, crypto proponents have likened it to gold, a resource of relative scarcity that is considered a commodity. This argument extends itself even to the federal government, where the Securities and Exchange Commission has repeatedly referred to various crypto assets as securities, while the Commodity Future Trading Commission has called crypto a commodity. The regulatory discrepancy has led to a confusing legal turf war that has sought to determine the exact nature of digital assets.Gizmodo reached out to Lido for comment. Those rooting for Lido in the suit predictably criticized the judges decision. Today, a California judge dealt a huge blow to decentralized governance, wrote Miles Jennings, a16z cryptos General Counsel and Head of Decentralization, on Monday following Chhabrias ruling.
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