Autonomous Organizations Based on Decentralization Found to Fall Short of Legal Decentralization Standards
In a significant development for the web3 industry, the Lido DAO, one of the largest decentralized autonomous organizations (DAOs), is currently embroiled in a class-action lawsuit over claims of selling unregistered securities. The lawsuit, filed by plaintiff Andrew Samuels, accuses Lido's founders of setting up the DAO with the explicit goal of avoiding regulatory scrutiny for allegedly illegal business practices. Samuels, who bought Lido's tokens (LDO) and lost money on his investment, is seeking compensation on behalf of all affected parties. Gizmodo reached out to Lido for comment, but the organization maintains that it is not selling securities at all. However, Judge Vince Chhabria, in California, has found that under state law, Lido represents a 'general partnership' and is therefore subject to the same regulations that such arrangements are beholden to. The debate over whether crypto assets represent a security or a commodity is intensifying. Securities are financial instruments that often represent a stake in a company, while commodities are goods with a particular investment value. Crypto proponents argue that they are not selling securities and, thus, are not beholden to the financial laws and regulations that govern traditional stocks. The regulatory discrepancy between the Securities and Exchange Commission (SEC) and the Commodity Future Trading Commission (CFTC) has resulted in a confusing legal 'turf war' to determine the exact nature of digital assets. Dolphin CL, LLC, a new company formed to respond to the litigation against Lido, has argued that Lido is just an algorithmically run program and, therefore, cannot be held liable for its actions. This argument, however, has not been accepted by Judge Chhabria, who has stated that Lido's founders are responsible for the DAO's operations. The Lido case raises 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. It also highlights the crypto industry's ongoing attempt to elude legal definition and culpability. DAOs, often hailed 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. This is a point underscored by Miles Jennings, the General Counsel and Head of Decentralization at a16z crypto, who criticized the judge's decision in the Lido case, stating that it dealt a huge blow to decentralized governance. The search results do not identify any specific companies that a U.S. federal judge has classified as 'institutional investors' of Lido DAO or held liable due to the lawsuit. Those organizations deemed Lido's institutional investors, including Paradigm Operations, Andreessen Horowitz, and Dragonfly Digital Management, should be deemed members of that partnership and held liable, according to the lawsuit. Dolphin CL, LLC, which represents Lido, is represented by a law firm, Brown Rudnick LLP. The outcome of this case could have far-reaching implications for the crypto industry, potentially setting a precedent for future regulatory actions. As the crypto industry continues to grow and evolve, it will be interesting to see how this case unfolds and whether it will lead to increased regulatory scrutiny for DAOs and other decentralized finance (DeFi) projects.
