How to explain to a judge that a DAO cannot be sued

Antonio Tejeda Encinas.
CEO, Meta Channel Corp Europe. President of the Euro-American Committee of Digital Law - CEA Digital Law

The rise of DAOs (decentralised autonomous organisations) has posed interesting challenges for the traditional legal framework. In a legal system built on the legal personality of entities such as companies, the arrival of decentralised models that operate through smart contracts and blockchain protocols has sparked considerable debate about their liability and whether they can be sued.

The case at hand, Lido DAO, illustrates the problem perfectly. A California judge must decide whether an LLC (limited liability company) appointed by a DAO can appear in court proceedings as the DAO’s representative, or whether the claim should be dismissed because the decentralised organisation lacks legal capacity. What is at stake, in essence, is whether a DAO can be regarded as a general partnership and therefore be sued in jurisdictions where legal liability is attributed to it.

The legal personality of DAOs: a contested fiction:
The general theory of companies allows the law to grant legal personality to entities that are, in essence, groups of people joining forces in pursuit of a common goal. This legal fiction has been a cornerstone of the modern economy, enabling companies and corporations to act as a single unit before the law. In the case of DAOs, however, the very structure of these organisations clashes with this traditional notion.

In the more than five years I have spent studying DAOs, I have never ceased to be surprised by how many challenges they pose to the legal system. This case, in particular, highlights how difficult it is to fit a DAO into existing legal categories. Lido DAO, a DeFi (decentralised finance) platform, allows users to take part in Ethereum staking without having to lock up their ETH tokens. On 3 April 2024, a class action was filed against Lido DAO, describing it as a ‘general partnership’ operating in the Ethereum staking business and alleging that LDO tokens are securities that the DAO unlawfully offers to the public.

The DAO’s litigation strategy: a legal paradox:
So far, the legal dispute does not seem out of the ordinary. Several lawsuits have been brought against DAOs over the years, with mixed results. What is truly fascinating about this case is the litigation strategy Lido DAO has adopted in its defence. Rather than accepting that it is properly before the court, the DAO takes a stance of ‘denial of capacity’. In other words, it argues that a DAO, given its decentralised nature and its existence as software code, cannot be sued because it has no legal personality.

This defence raises a fundamental paradox: how can a DAO claim that it lacks the legal capacity to be sued while at the same time taking part in the proceedings through an LLC appointed as its representative? This contradiction is precisely what is at issue in this case, and it could set an important precedent for the legal future of DAOs.

Lido DAO has appointed Dolphin CL LLC to appear before the court and file a motion to dismiss the claim, citing ‘lack of capacity to be sued’. However, this LLC does not act as the DAO’s attorney or formal representative. In fact, Lido’s decision expressly states that Dolphin CL LLC has no legal authority over the DAO and does not officially represent its interests.

A comparative approach – Spain: how would other jurisdictions react?
At this point, it is worth considering how a court in another jurisdiction, such as Spain, might deal with a similar case. Imagine, for example, a Spanish judge at a preliminary hearing in a claim against a DAO. What would happen if a ‘mandatario singular’ (a specially appointed agent) designated by the DAO appeared to argue that ‘software cannot be sued’?

Such a situation would challenge the judge’s conventional understanding. Used to dealing with traditional legal entities, the judge might find it hard to grasp how an organisation that actively participates in the economy, carries out transactions and manages assets in a decentralised way can claim that it bears no legal liability. It would be interesting to see whether the Spanish courts would take a similar approach to California’s, or follow other criteria, perhaps influenced by the European legal framework.

Final thoughts and angles still to explore:
This case has many interesting angles, from the application of the in pari delicto doctrine to the legal nature of tokens and of the transactions carried out by DAOs. The plaintiff in this case is a token holder, which adds further complexity to the dispute. To what extent can a token holder be considered an interested party in a lawsuit against a DAO? And, more importantly, how does that relationship affect the analysis of the DAO’s legal liability?

Finally, it is worth stressing that this case will affect not only Lido DAO but will also set a precedent for all DAOs operating in the DeFi ecosystem. Its outcome could determine how courts view DAOs in the future, and whether DAOs will have to adapt to new rules governing their operations or will continue to operate on the margins of the traditional legal system.