SEC Chair Gensler to Resign; Decentralized Governance Ruling by CA Judge; Congressional Letter on Tornado Cash; Coin Center v. Treasury Oral Arguments
SEC Chair Gensler to Resign
What happened?
Last Thursday, Securities and Exchange Commission (SEC) Chair Gary Gensler announced his resignation effective January 20, 2025.
Just a week earlier, Chair Gensler delivered a speech at the Practising Law Institute’s 56th Annual Institute on Securities Regulation, in which he reflected on the SEC’s treatment of crypto markets during his tenure. During his speech, the Chair touted the actions brought “against participants in the crypto markets that were not following the common-sense rules of the road,” in which “[c]ourt after court has agreed with [the SEC’s] actions to protect investors and rejected all arguments that the SEC cannot enforce the law when securities are being offered—whatever their form.” The Chair aimed to remind listeners that, firstly, entities selling securities ought to follow proper registration and disclosure procedures, and, secondly, that “broker-dealers, exchanges, clearinghouses” also need to register and be subjected to regulation. The Chair ended the portion of his speech on crypto by telling the audience that “[h]istory has shown for 90 years that robust securities regulation both creates trust in markets and fosters innovation.”
What does this mean?
Same old; same old. For the last three years, Chair Gensler has claimed authority over the crypto industry without Congressional approval and has cost the crypto industry $400 million in legal costs, driving the industry off-shore. Even in the face of multiple lawsuits and court decisions rejecting his claim to authority, his recent speech conveys his false convictions. But his resignation turns the page, and the industry awaits a new chair.
Decentralized Governance Ruling by CA Judge
What happened?
Last Tuesday, the District Court for the Northern District of California issued an order largely denying Lido DAO’s motions to dismiss the claims in Samuels v. Lido DAO.
The plaintiff, Andrew Samuels, brought claims against Lido DAO—a decentralized autonomous organization (DAO) that operates a staking service—and several of its institutional investors, including Paradigm, Andreessen Horowitz, Dragonfly Digital, and Robot Ventures (the “investor defendants”). Samuels alleges that the DAO sold unregistered securities through its issuance of the token LDO, therefore violating Section 12(a)(1) of the Securities Act. He also alleges that the investor defendants are jointly and severally liable for the misconduct as members of the Lido DAO general partnership.
This past July, the Lido community voted to appoint Dolphin CL, LLC to represent the DAO in court. Dolphin also filed a motion to dismiss, challenging the court's jurisdiction, arguing that the DAO is merely software and lacks legal personhood and therefore does not have the capacity to be sued.
At the motion to dismiss stage, the court must presume that all of the facts alleged in the plaintiff’s complaint are true and must draw all reasonable inferences in their favor as the nonmoving party.
In this case, the court addressed three distinct questions regarding DAO governance structures, their liability to civil suit, and the scope of Lido DAO’s liability to purchasers of LDO under the Securities Act of 1933.
Can Lido DAO be sued as a partnership under California law?
Concluding that Lido DAO did in fact qualify as a general partnership, the court rejected the defendants’ arguments that Lido DAO is autonomous software and its decentralized structure or lack of formal incorporation rendered it immune from liability. The key element the court considered was whether there was an “association with the intent to carry on a business for profit.” Finding that the plaintiff plausibly alleged such an association, the court looked to the investor defendants’ participation in Lido DAO’s original design, operations, decision-making via tokenholder votes, and governance structure. The court held that the lack of an explicit agreement between DAO members regarding profit sharing “does not mean that their goal in running a business together was not to make money.”
Are the investor defendants general partners in Lido DAO?
The court next examined whether the investor defendants—Paradigm, Andreessen Horowitz, Dragonfly, and Robot Ventures—were general partners in Lido DAO and thus jointly liable for its actions. The court found sufficient allegations to conclude that the conduct of Paradigm, Andreesen Horowitz, and Dragonfly likely made them general partners under California law. The principal evidence the court looked to was their substantial investments, participation in governance, and influence over Lido DAO’s decision-making. The court did, however, grant Robot Venture’s motion to dismiss, finding Samuels’ allegations of their involvement in Lido DAO’s governance and operations were insufficient to make them likely to be a general partner.
Can Lido DAO be held liable for the plaintiff’s financial losses under section 12(a)(1) of the Securities Act?
Section 12(a)(1) of the Securities Act imposes liability on any person who offers or sells a security in violation of the Act’s registration requirements under Section 5, allowing purchasers of unregistered securities to seek rescission or damages through civil actions.
Although Samuels purchased LDO tokens on a secondary exchange, the court found that liability under Section 12(a)(1) extends beyond direct sales to include entities that solicit the purchase of securities. The court held that Samuels had adequately alleged that Lido DAO actively solicited token purchases through exchange listings, promotional activities, and governance incentives, benefiting financially from increased token demand and market value.
The court rejected the defendants’ argument that Section 12(a)(1) liability applies only to public offerings. While the tokens were purchased on the secondary market, the court emphasized the broad language of the statute, which covers sales of unregistered securities made “through the use or medium of any prospectus or otherwise.” The court concluded that liability under Section 12(a)(1) is not inherently limited to initial public offerings, and exemptions under Section 4 of the Securities Act, rather than limitations in Section 12(a)(1), determine whether specific transactions are excluded.
What does this mean?
The denial of the defendants’ motions to dismiss has profound effects for the digital asset industry. By treating Lido DAO as a general partnership, the court pierced the veil of decentralization. This creates a precedent that decentralized governance participants may face joint and several liability for alleged violations of securities laws. For DeFi projects, this ruling underscores the need for careful structuring of governance and operations to minimize legal exposure. DAOs that rely on token-based voting or treasury management may no longer escape classification as unincorporated partnerships if their activities align with profit-making and control dynamics.
Congressional Letter on Tornado Cash; Coin Center v. Treasury Oral Arguments
What happened?
On November 14th, Representatives Sean Casten (D-IL), Stephen Lynch (D-MA), Bill Foster (D-IL), Brad Sherman (D-CA), David Scott (D-GA), Emanuel Cleaver (D-MO), and Joyce Beatty (D-OH) wrote a letter to Secretary of the Treasury Janet Yellen and Acting Under Secretary for Terrorism and Financial Intelligence Bradley Smith requesting detailed information regarding the cryptocurrency “mixer” Tornado Cash. The representatives note that despite the sanctions, Tornado Cash has remained online and continues to function through decentralized smart contracts. After the sanctions designations reduced its usage by 85%, there has been a resurgence in mixer activity, with Tornado Cash handling $1.8 billion in deposits in early 2024.
The letter requests answers to specific questions about the scale of illicit activities involving Tornado Cash since 2022. It also inquires about the regulatory and legal actions taken against those using or supporting Tornado Cash and Treasury’s plans to finalize proposed rules to require blanket reporting on transactions involving “mixers.” Finally, the letter urges Treasury’s Financial Crimes Enforcement Network (FinCEN) to advance a rulemaking on cryptocurrency mixers.
Additionally, on November 19th, the Eleventh Circuit Court of Appeals heard oral arguments from Coin Center and the Department of Treasury’s Office of Foreign Assets Control (OFAC) regarding OFAC’s sanctions of Tornado Cash smart contracts. Coin Center appealed the district court’s decision in favor of OFAC, arguing that OFAC exceeded its authority by placing certain Tornado Cash smart contracts on its sanctions list. They contended that these sanctions prevent U.S. citizens from using Tornado Cash for lawful privacy purposes.
A significant portion of the oral arguments focused on whether Tornado Cash addresses constitute “property,” and if so, whose property. OFAC relied on the International Emergency Economic Powers Act (IEEPA) to impose sanctions, which requires that the sanctioned entity or addresses qualify as property of foreign nationals. Coin Center argued that Tornado Cash is non-proprietary and that transactions conducted through Tornado Cash do not involve foreign property as defined under IEEPA. The district court had ruled that “anything that creates indirect benefits for foreigners constitutes an interest in property,” a rationale Coin Center criticized as overreaching.
Coin Center’s primary argument is that Tornado Cash does not meet the definition of “property” under IEEPA because it cannot be owned or controlled. Even if Tornado Cash were to be classified as property, Coin Center maintains that foreign entities lack any legal or beneficial interest in the transactions conducted within the software.
What does this mean?
There remains confusing distinctions between software, entity, and organization in crypto, demonstrated by both the letter and ongoing litigation. However, Coin Center is correct to point out that the decentralized Tornado Cash protocol does not constitute “property” under IEEPA, because it is neither owned nor controlled. We’re hopeful that the Eleventh Circuit will realize this distinction and overturn the previous court’s ruling. Earlier this year, the Fifth Circuit heard oral arguments examining the same issues in Van Loon v. Treasury.
***Don’t forget to check out a new paper from DEF on Money Services Businesses: Link ****
