Sarcuni v. bZx DAO

The bZx Protocol (protocol) was a decentralized finance application that enabled users to engage in cryptocurrency transactions. The protocol was initially controlled by bZeroX LLC and Leveragebox LLC (defendants), entities cofounded by Tom Bean and Kyle Kistner (defendants). In August 2021, control of the protocol was transferred to the bZx DAO (DAO) (defendant), a decentralized autonomous organization controlled by persons holding BZRX tokens—a cryptocurrency issued by the DAO (tokenholders). Kistner publicly stated that the shift to community control was intended to avoid regulatory-compliance obligations. As part of the transition, bZeroX LLC transferred approximately $80 million in assets to the DAO and dissolved, leaving the DAO responsible for maintaining and developing the protocol. Tokenholders possessed governance rights, including the power to propose and vote on actions such as treasury spending, policy changes, and distributions. Tokenholders also allegedly shared in the protocol’s profits. In November 2021, a hacker infiltrated the protocol, resulting in a loss of roughly $55 million. Several affected users (plaintiffs) filed a putative class action alleging that tokenholders were general partners in a partnership formed by the DAO and were therefore jointly and severally liable for the protocol’s negligence that led to the hack. The DAO moved to dismiss, arguing that treating all tokenholders as general partners would constitute an improper expansion of partnership law.