Cryptocurrency may be a new thing, but it has to fit into existing legal pigeonholes nonetheless … [+]
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A number of folks got together to create a business that would take advantage of a cryptocurrency protocol known as bZx, that was supposed to be super-duper secure, or, as they put it, no depositor of cryptocurrency should “ever worry about … getting hacked or [anyone] stealing [their] funds.” Of course, that’s exactly what happened: Using a simple e-mail phishing scam, hackers were able to get into one of the bZx developer’s accounts and obtain passphrases which allowed the hackers to steal about $55 million worth of cryptocurrency. This by itself is not remarkable, as hardly a week goes by that I don’t read some article or another about millions in losses due to the hacking of cryptocurrency accounts. But let’s continue, as this eventually becomes very interesting.
The bZx folks did not make good the losses, and so some of the depositors started a class action lawsuit in the U.S. District Court for the South District of California. But who to sue? The bZk protocol isn’t a real person or even a recognized legal entity, but instead is what is known as a de-centralized autonomous organization, known as a “DAO” and which one might describe as sort of a financial anarchy where ultimately nobody claims ultimate responsibility — kind of a legal mist if one wants to think of it that way.
Fortunately for these depositors, the law doesn’t think in terms of either financial anarchy or legal mists, but instead operates to sort things out into discrete pigeonholes. Everything in the legal world goes into one pigeonhole or another; if something doesn’t seem to fit into any particular pigeonhole, particular because it is something new, then the law operates to cram it into a default pigeonhole anyhow, which might be characterized as something like a miscellaneous pigeonhole with a sign above it that says, “Everything else goes here.”
When it comes to business organizations, that default pigeonhole is the general partnership. If something is a business organization, but it is not a corporation, limited liability company, limited partnership, statutory trust (or one of several types of exotic entities), then what the law sees is a general partnership. Or, going back to our sign, everything else goes into the general partnership pigeonhole.
For folks involved with them, general partnerships are bad news for the reason that everybody involved with the entity is deemed to be a general partner, and general partners are generally liable for the debts and liabilities of the partnership. Contrast this with corporations, where the entity itself has liability but the shareholders do not. Contrast this with limited liability companies where the entity itself has liability but the members to not. Even contrast it with a limited partnership where the limited partners have no liability, but the entity itself and only the general partners have liability. With a general partnership everybody is legally responsible for the debts and liabilities of the entities.
Thus, what the depositors alleged is that the bZx de-centralized autonomous organization is, for legal purposes, just a general partnership. That means that everybody who was involved with the bZx DAO is potentially on the hook for liability. When the depositors sued, they just sued pretty much everybody who was involved with the bZx protocol in relation to the …….