In Web3, one of the most dangerous misconceptions is believing that code and decentralization will protect you from legal problems. DAOs often present themselves as independent, community-governed structures, but the legal reality is far more direct.

Without a properly formalized legal entity, DAO participants - from founders to developers - can unknowingly take on unlimited personal liability. Courts and regulators don’t see an “abstract network”; they see an unincorporated partnership, and they go after real people, not just the project.

When Code Is No Longer a Shield

The illusion of “diffuse responsibility” is a legal minefield. Regulators don’t care how a smart contract is coded; they care about who controls outcomes. Who manages the treasury? Who issues tokens? Who signs contracts or speaks publicly for the project? Who receives the fees and benefits? If these activities can be tied to individuals, decentralization will not shield them.

This is especially true in the US and Europe, where courts increasingly classify DAOs as general partnerships - structures where each participant can be liable with all personal assets. That means your house, savings, and investments could be at risk because of DAO activities.

Four Layers of Risk: From Regulatory to Reputational

Regulatory Risks

Regulatory enforcement is the biggest threat. Agencies like the SEC and CFTC don’t sue “code”; they sue people. In CFTC v. Ooki DAO, regulators classified the DAO as an unincorporated association and held voting participants liable.

These risks are not limited to the United States. European regulators increasingly classify DAOs as collective investment vehicles or unregistered associations, exposing participants to liability under EU securities and AML frameworks. In Asia, jurisdictions such as Singapore and Hong Kong have tightened rules on token issuance and governance participation. Even in otherwise crypto-friendly jurisdictions, authorities may still hold individuals liable if DAOs lack a recognized legal form.

Financial Risks

Without a legal entity, fines and damages can be collected directly from personal bank accounts. Taxation also becomes problematic, with no clear framework on who should report income or pay taxes. Creditors can even file class-action lawsuits, exposing all DAO participants.

In addition to regulatory enforcement, DAOs also face private lawsuits and class actions from investors, users, or creditors. Courts in multiple jurisdictions allow plaintiffs to sue DAO participants personally, arguing that their votes, multisig signatures, or promotional activities constitute active management. This dual exposure - public enforcement plus private litigation - makes personal liability a real and ongoing threat worldwide.

Operational Risks

Internal disputes, smart contract hacks, or treasury mismanagement can spiral into lawsuits among participants. Without formal agreements, these conflicts create chaos.

Reputational Risks

Regulatory actions, lawsuits, or frozen accounts destroy community and partner trust. Once confidence erodes, DAOs lose partners, capital, and ultimately viability.

Who Is at Risk: From Founder to Contributor

Founders and Core Team

Founders are regulators’ primary targets, viewed as the key beneficiaries and controllers. Public actions - token launches, marketing, partnerships - are treated as business activities of an unregistered entity.

BitClout Case (2024–2025): The SEC charged founder Nader Al-Naji with fraud and unregistered securities sales related to the BitClout token. Regulators emphasized his control, showing decentralization offered no shield.

Active Participants (Multisig Holders, Delegates)

Multisig signers and governance delegates often underestimate their exposure. Courts increasingly treat voting on proposals or signing DAO transactions as evidence of control—comparable to managing a business.

Ooki DAO Case (2023): The CFTC secured a judgment recognizing Ooki DAO as an “unincorporated association,” imposing penalties and leaving participants exposed.

Lido DAO Case (2024–2025): A California court allowed a lawsuit to proceed against Lido DAO, treating it as a general partnership and potentially implicating governance participants, including major VCs.

Passive Token Holders

Simply holding governance tokens is low risk—until you vote, initiate proposals, or promote the token as an investment. Once you act, you move into the “governor” category, where regulators see you as managing an unregistered business.

Developers

Developers are relatively safer if they only write code without participating in governance, treasury management, or public promotion. However, liability increases if they act beyond coding.

Roman Storm Case (2023–2025): The U.S. Department of Justice and the Office of Foreign Assets Control (OFAC) pursued Tornado Cash developer Roman Storm, alleging violations of sanctions and money laundering laws. While the case is ongoing, it shows that even founding developers who did not directly control governance can face criminal and regulatory scrutiny if authorities perceive them as enabling illicit activity. This highlights the blurred line between building code and being held responsible for how it is used.

How to Build a Bridge Between Decentralization and Law: Practical Steps

Legal Structuring

Creating a DAO legal wrapper - such as a DAO LLC, foundation, DUNA, or association - establishes a clear separation between the DAO, as an organization, and its members. A proper legal structure enables corporate liability protection for DAO members and contributors, and allows the DAO to engage in off-chain operations, access fiat, enter into contracts, and more.

Jurisdictions like Wyoming, Cayman Islands, Marshall Islands, and Switzerland provide DAO-specific structures that protect members and enable contracts, banking, and compliance.

Compliance Procedures

A DAO should approach the AML/CTF matters carefully. This includes implementing baseline KYC procedures, on-chain AML monitoring to ensure no illicit funds are taken in, develop clear treasury rules and governance policies within the organization. Transparent voting processes are not enemies of decentralization. They demonstrate maturity, build trust, and reduce enforcement risks.

Hybrid Governance Models

Successful DAOs often keep decentralization for protocol-level decisions but assign treasury or high-risk functions to a separate legal entity. Essentially, a DAO can 'wrap' their reasury within distinct DAO for additional legal protection and liability ring-fencing.

Beyond legal implementation, the DAO must further deploy proper technical safeguards and procedures to enforce the governance and security measures.

Agreements and User-Facing Docs

Formal agreements with contributors and user documentation placed in the dApp and on the website essentially structure the relations of the DAO with these counterparties legally. They govern the relationship, define rights and obligations, limit liability, and determine other material aspects of the operations – the first line of defense.

Conclusion

Decentralization is a technical design, not a legal shield. Without legal structuring, DAOs risk exposing founders, contributors, and even developers to personal liability as if they were running a general partnership.

Any technical structure must always be supported and implemented via legal instruments and setups. Unfortunately, code-is-law does not work by default as we wanted it to work, which requires that both technical and legal safeguards are deployed to structure and protect the organization.

At DAObox, we work with DAOs to design legal wrappers, implement governance frameworks, and build compliance processes that reduce personal risk and provide operational clarity. The future of DAOs belongs to projects that combine decentralization with sound legal structures, giving participants confidence and long-term protection.

Frequently Asked Questions

Are DAO founders personally liable?

Yes. Without a legal wrapper, courts often treat DAOs as general partnerships, making founders personally liable for debts, fines, and enforcement actions.

Can DAO voters be sued?

Yes. In the Ooki DAO case, regulators argued that simply voting on governance proposals constituted active participation. Courts may view voters and multisig signers as partners, exposing them to unlimited liability.

What is a DAO legal wrapper?

A legal wrapper is a formal entity – such as an LLC, foundation, or association – that gives a DAO legal personality. It separates liability between participants and the organization, allowing DAOs to sign contracts, pay contributors, and comply with regulations safely.

Which jurisdictions are best for DAOs?

Popular jurisdictions include the Cayman Islands, Marshall Islands, Switzerland, and Wyoming, each offering different advantages in liability protection, tax treatment, and regulatory clarity.

Are DAOs only at risk in the U.S.?

No. Courts and regulators in Europe, Asia, and offshore jurisdictions have also begun examining DAOs under existing partnership, securities, and AML laws. Liability can arise in any country where participants, investors, or counterparties are based.

Can DAOs face private lawsuits?

Yes. Beyond regulators, investors and creditors can bring private claims or class actions against DAO participants. Such cases can be filed in multiple jurisdictions, further complicating defense and increasing financial risk.