Whose DAO Is it Anyway?

Litigation involving Decentralised Autonomous Organizations (DAOs) continues to be a rare occurrence, as legal frameworks surrounding cryptocurrency and blockchain technologies continue to evolve. The case of Mantra Dao Inc. and Another v. John Patrick Mullin and Others [2024] HKCFI 2099 presents a unique scenario, shedding light on how the Courts may approach legal issues relating to the ownership of and governance within a decentralised finance platform. Pádraig Walsh and Oliver Lam from our Fintech practice explain more.

The Plaintiffs’ claims

The dispute centres on the Mantra DAO project. The First and Second Plaintiffs claim they originally conceived and developed the Mantra DAO project, and believe that the project should ultimately be controlled and managed by them. They entrusted daily management to the Defendants, who were employees of the Second Plaintiff.

The Plaintiffs claim that the Defendants began treating the project as their own, and ultimately misappropriated the project and its business and assets from the Plaintiffs. The Plaintiffs further alleged that the Defendants made various “unaccounted-for” withdrawals from a cryptocurrency account belonging to the First Plaintiff.

The Defendants’ responses

In their defense, the Defendants argued that the project was not owned by any single entity, but instead operated under a governance model where decision-making power resided with OM token holders, and not by single individuals or entities.

The first Plaintiff and a Seychelles foundation were formed for the project, but were not intended to hold assets of the project as beneficial owners. Rather, the Defendants claim that the role of both the first Plaintiff and the Seychelles foundation was to hold those assets for the benefit of OM token holders.

The Seychelles foundation was governed by members of a council. The Defendants claim that the councillors were granted authority under the White Paper for the project to act on behalf of the project and OM token holders, including by votes of OM token holders under governance rights granted to them. The 1^st to 4^th Defendants were elected by OM token holders as Councillors; representatives of the 2^nd Plaintiffs did not seek re-election. The Councillors had the authority to deal with assets of the project, including the withdrawals in dispute, and those withdrawals were for legitimate business purposes.

Court’s Findings

This reported decision was in respect of the Plaintiffs interim application for a disclosure order to inspect the project’s financial records held by the Defendants dating back to January 2021. The Plaintiffs had previously lost an application for more wide-ranging interim injunctions and disclosures. The application was narrowed to seek the disclosure of books and records. The Court did not hear witness evidence, and the full range of issues between the parties was not under consideration. Instead, the Court needed to decide if there were serious issues to be tried in respect of the claims, and if so, whether the balance of convenience favoured granting the more limited disclosure order requested by the Plaintiffs.

The Court ultimately granted the disclosure order requested by the Plaintiffs. Lok J. acknowledged that damages would not be an adequate remedy if the application was refused. As the Plaintiffs’ claim was for ownership, management and control of the project, the Plaintiffs needed visibility on the project’s financial operations in order to quantify loss or make claims in respect of the Defendants’ actions.

Interestingly, Lok J. commented that the managers of the project should be under some kind of duty to keep proper accounts, and granting the order would promote the healthy operations of the business. He rejected that this would impose an undue burden on the Defendants, as it was a duty the Councillors owed in any event to OM token holders.

Key Takeaways

This is a judgement at an interim stage in legal proceedings. The judgement does not give any indication of the likely outcome at trial of the claims by the parties.

Nonetheless, the case draws the veil back on typical structures used for DAOs, and the complexities surrounding their governance, and ownership of and rights to DAO assets. If this dispute does proceed to trial, it will be interesting to have the legal arrangements in respect of Mantra DAO analysed, argued and decided upon

Lok J. reserved any consideration of the legal effects of the Governance Agreement, White Paper, Management Agreement and Employment Agreements until those matters are fully investigated at trial. These are still the kind of documents that DAO projects use to document their operations. Those seeking best practice guidance will benefit from a Court’s consideration, interpretation and ruling on those documents.

A full trial and judgement may also address some running issues in the DAO community. What is the scope of duty of councillors of a foundation entrusted to govern DAO operations? How is the source of their authority derived or granted? To what extent can preliminary documents, such as White Papers, grant authority in respect of a contemplated governance structure? What is the personal liability of councillors for breach of duty? Who actually owns DAO assets?

The legal frameworks for DAOs continue to develop. Given the value of assets involved, the situation is ripe for more litigation in the future. This will ultimately lead to best (or better) practice guidance for the DAO community. In the meantime, the concrete takeaway from the interim ruling in this case is that councillors of DAO foundations should be mindful of the expectation of Hong Kong courts that they must maintain proper accounting records – even in respect of decentralised projects.

Pádraig Walsh and Oliver Lam

If you want to know more about the content of this article, please contact:

Pádraig Walsh

Partner | Email

Disclaimer: This publication is general in nature and is not intended to constitute legal advice. You should seek professional advice before taking any action in relation to the matters dealt with in this publication. This article was last reviewed on 06 January 2025.