Governance token holders to be ruled as legally responsible for projects
A federal judge in California believes that the DAOs should share legal risks for issues arising with parent projects. DAOs are decentralized crypto organizations that allow members to share decision-making as well as profits, but the central notion behind their existence is the decentralization of ownership, rather than the attribution of control to one specific entity or person.
The news arose after the District Judge, Larry Burns wrote an order to allow a lawsuit against the owners of BZRK, a governance token. BZRK holders could be responsible for a 55M USD hack after the protocol was hacked due to a bZx developer falling for a phishing scam.
bZx DAO and its founders have argued that their membership in a decentralized organization means that they do not have control or custody over deposited crypto by users in the bZk protocol.
However, the District Judge believed that BZRX tokens give control of the protocol and the revenue it generates to holders, which are factors often used to establish business ownership from a legal perspective. The judge concluded that the founders could be general partners, meaning that the business owners are not protected from legal liability, just like an LLC.
The ruling from Burns is understood to be a warning to DAOs that are only decentralized in name. Attorneys with DAO clients responded by saying that the control of protocol was not well-distributed after the bZx developer was able to access the DAO’s treasury.
bZx protocol was founded by Tom Bean and Kyle Kistner, who successfully launched it in 2019. At that time, the protocol was controlled by bZerox LLC, their company. However, two years later, they decided to transfer the control of the protocol to bZx DAO to be run by users who own BZRX tokens.
Later on, the bZx protocol was hacked after a developer clicked on a strange email containing a malicious document. This document contained malware that allowed the exploiter to access the developer’s crypto wallet. The attacker was then able to withdraw all of the protocol’s digital assets on Polygon and Binance Smart Chain. The attack resulted in 1.7M USD worth of crypto being stolen.
The founder of Hess Legal raised his voice over decentralization, saying that it is a “trap for the unwary.” He also added “just because an organization calls itself a DAO, [that] doesn’t mean it is a DAO. The autonomous aspect of it can be extremely challenging.”
Erich Dylus, an independent attorney, added that the fact that a DAO and its members can be considered a general partnership is “certainly not a shock to a lot of lawyers.”
“You don’t even have to consent to receive a governance token,” Dylus said. “You might not even know you’re holding a governance token. Traditionally, entry [and participation in] a general partnership… involves something a little more than that.”
On that same note, Eric Hess, the founder of Hess Legal, believes that identifying every BZRX holder is impossible as there are many members who are anonymous, and even more who are completely passive members. Hess added that trying to enforce the law in this case would be a very difficult task to perform.
Source: thedefiant.io
analyst opinion
Diego Kebork
A federal judge in California believes that the DAOs should share legal risks for issues arising with parent projects. DAOs are decentralized crypto organizations that allow members to share decision-making as well as profits, but the central notion behind their existence is the decentralization of ownership, rather than the attribution of control to one specific entity or person.
The news arose after the District Judge, Larry Burns wrote an order to allow a lawsuit against the owners of BZRK, a governance token. BZRK holders could be responsible for a 55M USD hack after the protocol was hacked due to a bZx developer falling for a phishing scam.
bZx DAO and its founders have argued that their membership in a decentralized organization means that they do not have control or custody over deposited crypto by users in the bZk protocol.
However, the District Judge believed that BZRX tokens give control of the protocol and the revenue it generates to holders, which are factors often used to establish business ownership from a legal perspective. The judge concluded that the founders could be general partners, meaning that the business owners are not protected from legal liability, just like an LLC.
The ruling from Burns is understood to be a warning to DAOs that are only decentralized in name. Attorneys with DAO clients responded by saying that the control of protocol was not well-distributed after the bZx developer was able to access the DAO’s treasury.
bZx protocol was founded by Tom Bean and Kyle Kistner, who successfully launched it in 2019. At that time, the protocol was controlled by bZerox LLC, their company. However, two years later, they decided to transfer the control of the protocol to bZx DAO to be run by users who own BZRX tokens.
Later on, the bZx protocol was hacked after a developer clicked on a strange email containing a malicious document. This document contained malware that allowed the exploiter to access the developer’s crypto wallet. The attacker was then able to withdraw all of the protocol’s digital assets on Polygon and Binance Smart Chain. The attack resulted in 1.7M USD worth of crypto being stolen.
The founder of Hess Legal raised his voice over decentralization, saying that it is a “trap for the unwary.” He also added “just because an organization calls itself a DAO, [that] doesn’t mean it is a DAO. The autonomous aspect of it can be extremely challenging.”
Erich Dylus, an independent attorney, added that the fact that a DAO and its members can be considered a general partnership is “certainly not a shock to a lot of lawyers.”
“You don’t even have to consent to receive a governance token,” Dylus said. “You might not even know you’re holding a governance token. Traditionally, entry [and participation in] a general partnership… involves something a little more than that.”
On that same note, Eric Hess, the founder of Hess Legal, believes that identifying every BZRX holder is impossible as there are many members who are anonymous, and even more who are completely passive members. Hess added that trying to enforce the law in this case would be a very difficult task to perform.
Source: thedefiant.io
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