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Abstract

This Article discusses a topical legal issue in the area of Decentralized Finance (DeFi) and its corporate regulation: an ongoing controversy regarding the liability of Decentralized Autonomous Organizations (DAOs) has recently come to a conclusion whereby the District Court for the Southern District of California held, in Sarcuni v. bZx DAO, that the bZx DAO and its tokenholders were jointly and severally liable. Since its inception, DAOs have functioned as a legal wrapper for DeFi protocols and have operated in a regulatory vacuum. For the past couple of years, major regulatory enforcement agencies have pleaded for increased oversight in this particular field and recently their wish has been granted by the Sarcuni court in this case of first impression. It could be argued that the Sarcuni court has indeed solved this regulatory conundrum; however, this benefit comes at the expense of development and innovation in the DeFi space. This Article, rather than delving into the merits of the judgement, purports to scrutinize the Sarcuni court’s decision and argue for an alternative policy and technical measure better suited to ascertain liability of DAOs and its members. After tracing the facts, issues, judgement, and rationale behind the court’s analysis, this Article ultimately recommends a pathway forward for addressing the liability of DAOs, in both the short- and long-term.

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