In the latest update to a class action lawsuit against members of the bZX DAO, a U.S. district judge has ruled that the ability for developers to upgrade smart contracts, where the keys are in the hands of a single developer, makes the arrangement escrow.
On March 27, U.S. District Judge Larry Alan Burns ruled in a class action lawsuit against bZx DAO and others. While the ruling appears normal on the surface, Web3's lawyers have identified a significant development in decentralized autonomous organizations (DAOs).
The defendants in the case claim that transactions in the bZx protocol are non-custodial because users can place their assets in custody. However, a successful phishing attack renders the difference between the two terms moot. Court documents say: “A successful phishing attack on bZx developers gave hackers access to all funds purportedly held by [users], rendering the distinction between custodial and non-custodial moot here.”
Gabriel Shapiro, general counsel at encryption firm Delphi Labs, said on Twitter that the court's ruling means that a single developer holding the upgrade key will arrange safekeeping. Shapiro noted that this could mean the same thing for developers using multisig. If this happens, decentralized finance (DeFi) platforms that use multisig may be considered custodial platforms. This may require the projects to obtain the necessary regulatory licenses to comply with the law.
Gregory Schneider, Hedera's deputy general counsel, also commented on the lawsuit. According to lawyers, the ruling has significant implications for the DAO space. Schneider emphasized that the case must be "scrutinized carefully by anyone considering legal liability in the DAO space."
