Judge Rules Decentralized Autonomous Organizations Aren’t 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 web3’s largest decentralized autonomous organizations, suffered a legal blow in a litigation case that has sought to clarify yet another one of crypto’s 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 web3’s 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 Lido’s “institutional investors”—that is, the large companies that fronted much of its money and managed its operations—should 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.

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