Decentralized Autonomous Organization (DAO) for cryptocurrency alleged to be a general partnership in Sarcuni

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A number of people came together to create a business that would leverage a cryptocurrency protocol known as bZx that was supposed to be super secure, or as they put it, no crypto depositors. currency should “never worry about…getting hacked”. Where [anyone] flight [their] funds. “Of course, that’s exactly what happened: using a simple phishing email scam, hackers were able to gain access to one of developer bZx’s accounts and obtain pass that allowed hackers to steal an estimated $55 million worth of cryptocurrency is in itself not remarkable, as barely a week goes by without me reading one article or another about millions of losses due to the hacking cryptocurrency accounts. But let’s move on, because it ends up getting very interesting.

The folks at bZx didn’t make up the losses, so some of the depositors started a class action lawsuit in the U.S. District Court for the Southern District of California. But who to sue? The bZk protocol is not a real person or even a recognized legal entity, but rather something called a decentralized autonomous organizationknown as “DAO” and which could be described as a kind of financial anarchy where ultimately nobody claims ultimate responsibility – a kind of legal fog if you want to think of it that way.

Fortunately for these depositors, the law does not think in terms of financial anarchy or legal fog, but rather operates to sort things into discrete bins. Everything in the legal world goes in one locker or another; if something doesn’t seem to fit a particular locker, especially because it’s something new, then the law operates to put it in a default locker anyway, which could be characterized as something like a miscellaneous locker with a sign above it that says, “Everything else goes here.”

When it comes to commercial organizations, this default locker is the general partnership. If something is a business organization, but it is not a corporation, limited liability company, limited partnership, statutory trust (or one of many types of exotic entities), then what the law considers a general partnership. Or, going back to our sign, everything else goes in the partnership locker.

For those involved with them, partnerships are bad news because anyone involved in the entity is considered a general partner, and general partners are generally responsible for the debts and liabilities of the partnership. Contrast this with corporations, where the entity itself has a liability, but the shareholders do not. Contrast this with LLCs where the entity itself is liable, but the members are not. Same contrast with a limited partnership where the limited partners have no liability, but the entity itself and only the general partners have liability. With a general partnership Everybody is legally responsible for the debts and liabilities of the entities.

So, what the filers alleged is that the decentralized self-governing organization bZx is, for legal purposes, just a general partnership. This means that everyone who was involved in the bZx DAO is potentially responsible. When the filers filed a lawsuit, they simply sued just about everyone who was involved in the bZx protocol in relation to the hacking loss – including simple investors who would otherwise have been shielded from liability if the group bZg had been organized as a corporation, limited partnership, or an LLC.

The general liability general partners in a general partnership means that each of them assumes full responsibility for his liability. If the court finds that they have incorporated a general partnership (which is determined by a very lax standard) and that a particular defendant is a general partner, then that defendant will be liable for the full amount of liability regardless of the that defendant’s own actions or inactions with respect to the hacking incident. To say this is a brutal result would be correct, but that is how general partnership law works.

What happened with DAOs is the same thing that has happened over and over again with law for centuries: law is progressing very slowly, almost comically slowly, compared to technology which is progressing very quickly. So technology frequently outstrips the law in its development, and the courts then have to take whatever technology has done and cram it into one of the existing legal racks until the law (in the form of new laws) be passed by the legislatures. Here it results in the assertion that a very new and sophisticated form of organization in the manner of DAOs should be treated as one of the oldest forms of legal organizations in the form of a general partnership .

Is it right? It doesn’t matter, at least as far as the law is concerned. The only thing the law cares about is how something is dealt with under the law as it stands today, and the things that seem to require a new law to be crafted are, again, left to the legislatures. By the way, it seems to me that these DAOs should be organized into LLC series, but we’ll leave that for another day. What is certain is that DAOs are a palpable legal danger to themselves and everyone associated with them, and people with something to lose should stay away from them altogether for now. A brilliant lawyer is going to have to integrate DAOs into an existing legal structure, otherwise the outcome that seems likely in this case (everyone is liable as general partner) will play out with every DAO submitted, or at least their participants are subject to the American law.

Hats off to Johnny Lyle who finally persuaded me to write about it.

CITE AS

Complaint in Sarcuni vs. bZx DAO, Case no. 22-CV-618, doc. 1 (SDCal., filed May 2, 2022). https://jayadkisson.com/a_interesting/Sarcuni_Complaint.pdf

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