A court determines that DAO token holders are reasonable defendants in the bZx class action

Therefore, defendants who hold the DAO’s governance likely owe investors a duty of care.

A U.S. court refused a petition to include bZx DAO token holders as defendants in a class action lawsuit brought by victims of the November 2021 $55 million protocol attack.

According to the court’s judgment, bZx DAO is a general partnership. It noted that the plaintiffs presented sufficient evidence to classify the defendants who own the DAO’s governance tokens as general partners. Consequently, they are likely accountable for the group’s responsibilities under California partnership law.

bZx is a protocol for DeFi margin trading. In August of 2021, the platform designers migrated the protocol to a DAO administered by bZx DAO. Soon after bZx DAO, another community named Ooki DAO took control of the system. Members of Ooki DAO transferred their belongings to this new community. The United States Commodity Futures Trading Commission is now litigating Ooki DAO.

The court based its decision on statements made by the project team during the transition to a DAO structure. The creators of the bZx protocol argued at the time that the switch to a DAO would shield the project from regulatory difficulties. The Court also noted the U.S. Commodity Futures Trading Commission’s determination that bZx converted to a DAO to protect the project from regulatory monitoring and accountability under U.S. law.

In its judgment on Monday, the court agreed with the petitioner that DAO token holders owed protocol investors “a duty of care.” The court ruled that they failed to implement adequate security measures to prevent the breach in 2021. This is the case despite various statements on the protocol’s website about the project’s security.

In 2021, bZx lost $55 million due to a phishing assault. A team member was hacked after falling victim to a phishing attack. This gave the hacker access to the wallet’s private keys, allowing them to take the cash. This was not the first time bZx had been hacked since the platform had been hit the year before. Several such assaults cost the protocol around $9 million.

The applicants claim they suffered a loss of $1,750,000 in the November 2021 assault. In its Monday judgment, the court rejected claims against people who lacked governance tokens. The deadline for the plaintiffs to submit a second amended lawsuit is April 10.

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