BZX DAO class-action ruling: Dev with upgrade key makes platform custodial

In a new update to the class-action lawsuit against bZX DAO members, a United States district judge ruled that the ability for developers to upgrade a smart contract where the key is in the hands of a single developer makes the arrangement custodial.

On March 27, United States District Judge Larry Alan Burns passed a ruling concerning the class-action lawsuit against bZx DAO and others. While the ruling seemed normal on the surface, Web3 lawyers spotted a significant development for decentralized autonomous organizations (DAOs).

The case’s defendants claimed that transactions in the bZx protocol are noncustodial because users can maintain custody of their assets. However, a successful phishing attack rendered the difference between the terms meaningless. The court filing stated:

“A successful phishing attack on a bZx developer allowed a hacker to gain access to all of the funds supposedly in [users’] custody, rendering the distinction between custodial and non-custodial meaningless here.”

Gabriel Shapiro, the general counsel for crypto firm Delphi Labs, tweeted that the court’s ruling means that a single developer holding the upgrade key makes the arrangement custodial. Shapiro noted that this might also mean the same for developers with multisigs.

Should this happen, decentralized finance (DeFi) platforms that employ the use of multisigs may be seen as custodial platforms. This could require these projects to obtain the necessary licenses for custody to comply with the law.

Gregory Schneider, the deputy general counsel for Hedera, also commented on the lawsuit. According to the lawyer, the ruling is very significant for the DAO space. Schneider highlighted that the case must be “closely examined by anyone thinking about legal liability in the DAO space.”

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