Judge says token holders could be liable for DAO hacks

A judge for the United States District Court in the Southern District of California has ruled that DAO token holders can, as members of a general partnership, be held liable in a class action lawsuit for a hack suffered by bZx DAO.

The lawsuit relates to a hack the bZx protocol experienced in November 2021 when one of the developers was phished and it was compromised for approximately $55 million worth of tokens. After the hack, the ‘DAO’ voted to approve a plan that would eventually provide replacement DAO and debt tokens that would be repurchased. The plaintiffs in this lawsuit allege that this repayment would take “thousands of years.”

The plaintiffs allege that the holders of the BZRX tokens were part of a general partnership that was operating the bZx DAO. This would mean that individual token holders are liable for the injuries caused by the hack.

This decision could mean that even without participating in a governance vote, holding a token that has governance rights may be sufficient for you to be liable for the actions of the DAO.

Read more: Explained: CFTC proves DAOs are not ‘enforcement-proof’

Ooki DAO — formerly bZx — has also been engaged in a lawsuit with the Commodity Futures Trading Commission (CFTC) over the protocol, and the CFTC is currently seeking a default judgement.

The CFTC has previously alleged that Ooki DAO was an unincorporated association and that individual members who participated in the governance process could have liability for the actions of the DAO.

These rulings present an additional legal risk for those who choose to participate in these organizations, and will likely have a chilling effect on DAO participation.

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