The case involves substantive litigation that could yield important legal principles for the treatment of decentralised projects.
Decentralised autonomous organisations (DAO) are unique structures that operate autonomously in accordance with preset rules, utilising a blockchain and coordinated through a distributed consensus model. Whilst numerous DAOs are operating in the blockchain industry, these organisations are still new in legal terms and their precise legal status (including ownership and management issues) has seldom been tested in court. The recent case of Mantra Dao Inc. and Another v. John Patrick Mullin and Others1 is the first case handled by the Hong Kong Court on issues involving DAOs.
Background and Issues
The underlying dispute between the parties revolved around the ownership and proper management of a DAO finance platform project known as the MANTRA DAO (the Project). The Project was conceived and developed by certain shareholders and directors of the second Plaintiff, RioDeFi. As the Project grew, the Plaintiffs delegated the day-to-day management to the first and second defendants (the Defendants), who were employees of RioDeFi. According to the Plaintiffs, there was mutual agreement that the Defendants would regularly report to RioDeFi’s management on the assets, financials, and operations of the Project; however, reporting became less frequent. The Plaintiffs claimed that they had no visibility over the Defendant’s management decisions or how the Project’s assets were being deployed. Further, the Plaintiffs claimed that the Defendants had misappropriated the Project and its business and assets from the Plaintiffs, including assets from a cryptocurrency account allegedly belonging to the first Plaintiff, MANTRA DAO Inc. (Hex Account).
The Defendants alleged that the Project should not be owned or controlled by the Plaintiffs due to the nature of a DAO, in which the ultimate decision-making power lies with the holders of digital tokens (here, OM Tokens). The Defendants claimed that the Project was governed by the governance agreement reflected in the terms of the white paper circulated to potential purchasers of the OM Tokens (White Paper). The terms of the White Paper included that the first Plaintiff and a Seychelles incorporated foundation (Foundation) were legal entities incorporated specifically to hold assets for the benefit of the holders of OM Tokens (OM Token Holder), and not to be beneficial owners of the Project. The Foundation was to be governed by councillors (Councillors) who were granted authority to act on behalf of the Project and the OM Token Holders. There was no “misappropriation” of assets from the Hex Account because the Defendants — as Councilors elected by the OM Token Holders — had authority to authorise such withdrawals for legitimate business purposes envisaged in the White Paper.
The judgment concerned the Plaintiffs’ application for an interim order requiring disclosure of books and records relating to the operation of the Project (Accounts Disclosure Order), pending trial of the underlying ownership claim.
Decision
Since the application was for interim (as opposed to final) relief, the Court of First Instance refused to discuss in detail the overall merits of the claim, noting that cryptocurrency trading is a novel and innovative business that the courts in Hong Kong (as well as in many other jurisdictions) have little experience in dealing in terms of disputes, and may not be familiar with DAO operationand structures. Hence, the Court considered that the legal effects of the relevant agreements (including the governance agreement and the White Paper) should be left for determination at trial rather than handled at an interlocutory stage. Instead, the Court stated that the proper approach was for it to focus on the “balance of convenience” issues by examining the possible effects on the parties of the granting and non-granting of the Accounts Disclosure Order.
Applying this approach, the Court found that the “balance of convenience” favoured an Accounts Disclosure Order, for the following reasons:
- Considering the assets controlled and managed by the Defendants, it is important for the Plaintiffs to receive regular financial updates throughout the Project in order to (i) form an informed view on the Plaintiffs’ loss in monetary terms and/or (ii) lodge challenges against the Defendants’ management decisions, if any. The anonymised nature of cryptocurrency trading also meant that it would otherwise be difficult for the Plaintiff to achieve visibility over the Project’s finances;
- Damages are an inadequate remedy if the application is refused, as it would be difficult if not impossible to quantify the Plaintiffs’ loss in monetary terms if they have no visibility over the Project’s financial operations;
- The Accounts Disclosure Order would not disrupt the operation of the cryptocurrency trading business under the Project. In fact, compelling the Defendants to disclose the Project’s accounts would promote healthy operation of the business. The Court viewed that, no matter who is the entity owning or responsible for the operation of the Project, the Defendants, as Councilors, should be under some duty to keep proper account about the operation of the cryptocurrency trading business under the Project, and, if the Defendants’ case is upheld, a duty to account to the OM Token Holders about the funds in the Project. Notwithstanding that the substantive merits of the case were not under examination in these proceedings, it is noteworthy that the Court had already formed a view that OM Token Holders should benefit from information rights and disclosure about the property of the Project;
- The Accounts Disclosure Order should not cause too much additional burden to the Defendants, since they would have had to discharge such duty to the OM Token Holders in any event; and
- The risk of disclosure of trade secrets to the Plaintiffs was not a valid reason for the Court to deny the Accounts Disclosure Order, as a properly worded undertaking by the Plaintiffs’ legal and financial advisers should be sufficient to alleviate such concerns.
Takeaways
This case highlights the Hong Kong Court’s cautionary approach to setting down fixed principles in light of the fast-evolving nature of the crypto industry, where the determination of the precise nature of the legal relationships between parties may require extensive investigation into the substance and form of the relevant decentralised projects. The malleability of the balance of convenience test enables the court to engage in a fact-specific and holistic decision-making process, while veering away from a wholly technical discussion before conducting a full investigation at trial. A similar approach is likely to be adopted by the Hong Kong courts in future crypto-related cases involving other novel issues.
In view of the Court’s suggestion that the Defendants, as Councillors of the Project, should have a duty to keep proper accounts for the Project’s operation, and potentially a duty to account to the OM Token Holders regarding the Project’s funds, Councillors of DAOs should consider these potential duties when managing DAOs. Although the Court did not discuss the enforceability of such duties in this judgment, the Court’s acknowledgement of these potential duties seems to suggest that DAO token holders may potentially be able to bring claims (whether direct or indirect) against Councillors for breach of duties. Issues including the scope and nature of such duties, and the appropriate entity entitled to enforce such duties, will need to be tested in Court.
As to the underlying dispute concerning the ownership, management, and control of the Project (and DAOs in general), they are important and novel issues that will need to be decided at trial. Moreover, it remains to be seen whether the Court will engage in a deeper discussion to clarify the rights and obligations of various stakeholders of DAOs. Whether the dynamics between the DAO stakeholders will fit neatly into well-established categories of legal relationships, and whether we will see the emergence of wholly new relationships and principles adjusted for a technological age, remains unclear.
We will continue to monitor and publish updates on this topic, as the substantive litigation could yield important legal principles for the treatment of decentralised projects.
