Autonomous decentralized organizations are not as decentralized according to the law.
A blow to DAOs and decentralization in the crypto world
The industry has been characterized by its libertarian spirit, seeking to avoid traditional regulations while offering services that mimic those of the traditional economy. However, this approach has led to constant legal conflicts, such as the recent case against Lido DAO, one of the largest decentralized autonomous organizations (DAOs) in web3.
A federal judge in California ruled this week that Lido, accused of selling unregistered securities, is a “legal entity” under state law. This means that, although it presents itself as a decentralized system, it operates under the rules of a general partnership, making it responsible for complying with financial regulations. The decision also points behind Lido, such as Paradigm Operations and Andreessen Horowitz, as members of that partnership, making them responsible for the accusations. However, Robot Ventures, another associated firm, was excluded from this responsibility.
Are DAOs really decentralized?
Lido DAO argued in its defense that it is not a legal entity, but operates automatically. However, Judge Vince Chhabria rejected this argument, highlighting how the crypto industry seeks to avoid legal definitions to evade responsibilities. “The case raises important questions about the ability of people in the crypto world to protect themselves from liability through novel legal arrangements,” wrote the judge.
Lido’s defense has been controversial. Dolphin CL, LLC, a company created just in July to handle this case, argued that Lido cannot be held responsible because it is not a traditional organization. However, this reasoning did not convince the court, which emphasized that DAOs, although disguised as “revolutionary models,” resemble more traditional organizations than their proponents are willing to admit.
The regulatory battle defining the crypto world
The case of Lido highlights a central debate in the crypto industry: whether its assets should be considered securities or commodities. While the SEC classifies many crypto assets as securities, the Commodity Futures Trading Commission (CFTC) treats them as commodities, like gold. This discrepancy has generated confusion and a “battle of competencies” among regulators.
The plaintiff, Andrew Samuels, accuses Lido of selling unregistered securities under the guise of avoiding regulatory scrutiny. For its part, Lido insists that its LDO tokens do not qualify as securities. However, this case is another example of how the increasing influence of cryptocurrencies has attracted a level of scrutiny that threatens to redefine the sector.
Reactions and impact on the sector
The judge’s decision has sparked criticism among DAO advocates. Miles Jennings, a lawyer for a16z crypto, described the ruling as a “major blow to decentralized governance.” Despite these reactions, the Lido case could set an important precedent for determining how DAOs and other crypto organizations should operate within existing legal frameworks.
This article has been translated from Gizmodo US by Thomas Handley. You can find the original version here.
