Blockchain protocol users now have a slightly easier time holding cryptocurrency collectives accountable for their losses.
In a precedent-setting ruling on Monday, U.S. District Judge Larry Burns of San Diego determined that the blockchain-based decentralized autonomous organization bZx DAO was effectively a general partnership under California law. According to Burns’ logic, anybody who had the right to vote on DAO governance in 2021, the year in which a computer attack is said to have cost users $55 million in losses, is responsible for security lapses.
The U.S. Commodities Futures Commission sued defendants connected to the bZx DAO last year. Among other things, they asserted that decentralized blockchain technology is fundamentally different from a standard commercial partnership.
An undefined group of token holders with voting rights over governance issues controlled the bZx system, which let users engage in bitcoin margin trading. According to defense lawyers at Morrison Cohen and Hahn Loeser & Parks, those token holders never consented to split profits and losses like traditional corporate partners. To recognize these token holders as a partnership, according to the defense solicitor, would be to “radical expand and alter long-standing concepts of partnership law.”
Burns objected. The judge determined that the claims made by the plaintiffs’ attorneys from Gerstein Harrow were sufficient to prove that the protocol did, in fact, permit token holders to vote on how to allocate the DAO’s assets, just like a regular company can approve dividend payments.
The CFTC’s claim in the Ooki DAO case that the two persons who developed the bZx technology transferred authority to the nebulous, decentralized DAO deliberately to elude American authorities likewise convinced the San Diego judge. (That tactic obviously backfired.)
Burns cited California state case law holding that business organizations cannot structure partnerships that attempt to take advantage of “commercial intercourse” while trying to escape corresponding liability. In that regard, he said, it was entirely consistent with California precedent — and not a “radical expansion” of partnership law — to hold that the bZx DAO can be held liable as a general partnership.
Jason Gottlieb, the defense lawyer for the founders of bZx protocol and two of their predecessor companies, stated in an email that three out of four defendants have had claims against them dismissed, with one dismissal being due to jurisdictional grounds and the other dismissals resulting from the plaintiffs’ failure to demonstrate that they held bZx governance tokens.
Gottlieb is confident that the remaining defendants will also be dismissed once the plaintiffs’ allegations are addressed. Gerstein Harrow, the plaintiffs’ firm, did not respond to queries. Burns, the judge, ruled that the plaintiffs’ claims can proceed against two limited liability companies that allegedly owned bZx corporate governance tokens.
Burns is the first judge to decide on dismissing claims against alleged DAO members who argued that they could not be held liable due to the structure of the collective. His ruling implies that every bZx governance token holder during the 2021 hack could be held liable for users’ losses. Nonetheless, Burns’ ruling leaves several unanswered questions. While private litigation, regulatory actions, and criminal accusations have piled up against cryptocurrency issuers and exchanges, lawsuits against DAOs remain rare.
