The cryptocurrency industry has long been fueled by a libertarian philosophy that views government surveillance and regulatory control as enemies 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 market ungoverned by the traditional restrictions (or, more precisely, guardrails) of modern economies. In practice, this 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 major blow in litigation aimed at clarifying another of crypto’s many legal gray areas. Lido is currently the subject of a class action lawsuit accusing it of selling unregistered securities. An LLC representing the DAO relied heavily on Web3’s notion of “decentralization” in an attempt to take business away from Lido and its associates. Dolphin CL, LLC, which represents the Lido, claimed that the organization was only “software” and did not represent a “legal entity” and, therefore, could not be held responsible for its action, according to court documents. However, a federal judge rejected that argument this week, saying the Lido is indeed a “legal entity” and therefore must be subject to the same laws and regulations.
Judge Vince Chhabria held that under California law, Lido represents a “general partnership” and is therefore subject to the same regulations to which such agreements are subject. He also believed that organizations considered Lido’s “institutional investors” – that is, the large companies that invested much of its money and managed its operations – should be considered members of this partnership and , therefore, held responsible. These companies include investment firm Paradigm Operations, renowned venture capital firm Andreessen Horowitz, and investment firm Dragonfly Digital Management. A fourth company, Robot Ventures, was excluded as a partner.
It is worth noting the serious oddity of Lido’s legal defense strategy. Dolphin CL, LLC, is a new company created in July, at the request of Lido investors, to respond to the litigation against it, reports Bloomberg. Dolphin, himself, is represented by a law firm, Brown Rudnick LLP, writes the media. Again, Dolphin argued that Lido is just an algorithmically executed program and, therefore, cannot be held responsible for anything that happened to people who lost money on its crypto tokens .
In his ruling, Chhabria appeared to highlight the crypto industry’s continued attempt to evade legal definition (and, therefore, culpability), writing that “(the lawsuit filed against Lido) presents several questions news and important about the ability of people in the crypto world. protect themselves from liability by creating new legal arrangements to profit from exotic financial instruments.
There have been many mystifications about what the crypto industry is and does. DAOs, which have been called by their proponents “revolutionary” “governance models” in corporate decision-making, have more in common with traditional businesses than their leaders would like to believe. Like the rest of crypto, their proponents claim that their “decentralized” status allows them to operate outside the confines of traditional financial regulation and legal oversight. This seems to work well until a situation like this, where everyone is dragged into court and web3’s amorphous hifalutin terminology suddenly has to be firmly and consistently defined.
The Lido case revolves around another such legalistic dilemma. Lido is being sued by the plaintiff, a man named Andrew Samuels, on the grounds that he sold unregistered securities. Samuels purchased LDO, the Lido tokens, and subsequently lost money on that investment. Today, as a litigator, Samuels accuses the Lido founders of creating the DAO “for the explicit purpose of avoiding regulatory oversight for its fundamentally illegal activities.” However, Lido maintained that it was not selling securities at all.
This debate is, in many ways, THE debate, when it comes to the crypto industry. For years, Web3 has benefited from trading in uncharted regulatory territory. However, as the industry has become larger and more influential, its activity has come under increased scrutiny. Today, the question of whether assets represent a security or a commodity is an increasingly intense debate. Securities are considered financial instruments that often represent an ownership interest in a particular company, while commodities are assets that have a particular investment value. Crypto proponents have argued that they do not sell securities and are therefore not beholden to the financial laws and regulations that govern traditional stocks. In contrast, crypto proponents have compared it to gold, a relatively rare resource that is considered a commodity.
This argument even extends to the federal government, where the Securities and Exchange Commission has repeatedly referred to various crypto assets as securities, while the Commodity Future Trading Commission has referred to crypto as a commodity. Regulatory differences have led to a confusing legal “turf war” over the exact nature of digital assets.
Gizmodo has contacted Lido for comment.
Those supporting Lido in the lawsuit have, predictably, criticized the judge’s decision. “Today, a California judge dealt a major blow to decentralized governance,” Miles Jennings, general counsel and head of decentralization at a16z crypto, wrote Monday following Chhabria’s ruling.
