In a landmark development for the Web3 ecosystem, Hong Kong has become the first jurisdiction globally to adjudicate a legal dispute involving a decentralized autonomous organization (DAO). The case, MANTRA DAO Inc. and RioDeFi Inc. v John Patrick Mullin, William Donovan John Corkin and Others [2024] HKCFI 2099—referred to as the MANTRA case—marks a pivotal moment in the evolving legal recognition of blockchain-based governance structures.
While DAOs have gained traction in the U.S., Europe, and Dubai as innovative organizational models, Hong Kong’s judiciary has taken the lead in addressing their legal complexities. Over a two-year litigation process, courts grappled with the novel nature of blockchain technology, decentralized decision-making, and the legal responsibilities tied to digital governance. As the judgment noted:
"Hong Kong courts, like those in other jurisdictions, have limited experience in handling such disputes. The operational models and structures of these entities may not be fully understood."
This article explores the implications of the ruling and dives into one central question: What exactly is a DAO—and how should it be treated under the law?
Background of the Dispute
The project at the heart of the case—MANTRA DAO—was conceived in May 2020 by RioDeFi Inc. and its subsidiary Mantra DAO Inc. as a pioneering decentralized finance (DeFi) platform. According to the plaintiffs, they initiated the project by developing intellectual property, building the technical infrastructure, securing investments, and assigning key personnel—including defendants John Mullin and Will Corkin—to launch and manage operations.
Initially, Mullin and Corkin reported regularly to RioDeFi’s management on financial and operational matters. However, as the project gained momentum—reaching a market capitalization of $1.3 billion by October 2024 for its governance token, OM—the plaintiffs allege that the defendants ceased reporting and ultimately took full control of the project, excluding the original creators from access to financial data and decision-making.
The plaintiffs argue they retain rightful ownership and control over the project based on their foundational contributions and employment agreements with the defendants. In contrast, the defendants contend that MANTRA DAO is a true DAO, governed collectively by holders of OM tokens through smart contracts—making it inherently decentralized and not subject to unilateral ownership by any individual or entity.
Court Ruling: A Step Toward Transparency
The Hong Kong court granted an interim account disclosure order, requiring the individual defendants to produce detailed financial statements and supporting documentation for the project from January 1, 2021 onward. This is an ongoing obligation.
In reaching this decision, the court emphasized several key principles:
- Novelty of crypto disputes: Courts lack extensive precedent in blockchain-related cases. The governance mechanisms of DAOs and the legal weight of whitepapers require deeper examination during full trial.
- Inadequacy of damages: Monetary compensation alone would not sufficiently remedy harm if plaintiffs are denied access to financial information. Given the scale of assets involved, transparency is essential.
- High anonymity in crypto transactions: Tracing asset flows without disclosure is extremely difficult and costly.
- Transparency supports healthy operations: Disclosure does not disrupt business; rather, it promotes accountability and long-term stability.
- Fiduciary-like duties exist regardless of structure: Even if a project is decentralized, those managing it have a duty to maintain proper records—especially toward token holders.
- Minimal burden on defendants: Maintaining records is already an expected responsibility; disclosure does not impose undue hardship.
- Commercial confidentiality can be managed: With appropriate safeguards—such as legal advisors agreeing not to share sensitive documents—risks of information leaks are manageable.
This ruling underscores a foundational legal principle: governance and transparency obligations apply regardless of whether an entity operates on a blockchain or through traditional corporate structures.
Key Legal Questions Raised
As the case moves toward full trial, several critical issues will shape future DAO governance:
What Constitutes “Proper Record-Keeping”?
While courts mandate disclosure, they haven’t defined what qualifies as adequate documentation in a blockchain context. Should wallet-to-wallet transactions be accompanied by invoices? How should volatile digital assets be valued on balance sheets?
How Should Proof Be Presented?
With most transactions occurring pseudonymously between crypto wallets, what forms of verification are acceptable? Are screenshots of blockchain explorers sufficient? Should tax compliance—including mandatory pension contributions—be enforced for team payouts?
What Are the Reporting Obligations to Token Holders?
If DAO managers owe duties to governance token holders, what standards should apply? How frequently should reports be issued? What level of detail is required?
Can Token Holders Sue for Breach of Duty?
Though not addressed directly in this ruling, the court's acknowledgment of managerial obligations implies that token holders may have enforceable rights against mismanagement.
How Can Projects Prevent Asset Misappropriation?
Given that early contributors may later lose control, what internal controls—such as multi-sig wallets or on-chain voting thresholds—should be implemented from inception?
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These questions highlight the urgent need for clearer regulatory frameworks that balance innovation with accountability.
So, What Is a DAO?
A decentralized autonomous organization (DAO) is widely defined as a member-governed community that uses blockchain technology and smart contracts to coordinate actions and make collective decisions—without centralized leadership.
DAOs unite individuals around shared goals, whether profit-driven, social, or charitable. They represent a shift from traditional corporate hierarchies to transparent, code-based governance where voting power often correlates with token ownership.
According to a July 2024 report by the UK Law Commission, DAOs fall into three main categories:
- Pure DAOs: Operate entirely via code with no legal entity.
- Hybrid DAOs: Combine smart contracts with formal legal structures.
- Digital Legal Entities: Traditional entities using digital tools for governance.
Despite their promise, DAOs face unresolved challenges:
- Who bears legal liability for actions taken by code?
- Which jurisdiction’s laws apply when operations are borderless?
- How should taxation work when no single entity controls funds?
The UK report recommends against creating a new DAO-specific legal form for now but calls for reviewing existing corporate law—such as the Companies Act 2006—to accommodate flexible governance models. One proposal includes introducing a "limited liability nonprofit association" structure tailored for non-profit DAOs.
Toward a Legal Framework for DAOs in Hong Kong
There are now over 200,000 active DAOs worldwide, managing billions in value. Uniswap—one of the largest—has a treasury exceeding $4.5 billion. As noted by the World Economic Forum, funds held in DAO treasuries surged from $380 million in 2021 to $16 billion by year-end—a 40x increase—and peaked at $42.5 billion in early 2024.
Yet under current Hong Kong law, DAOs cannot be neatly classified as limited liability companies under the Companies Ordinance. This lack of clarity creates uncertainty around liability, taxation, compliance, and investor protection.
Should Hong Kong develop a flexible legal framework to support DAO innovation? Doing so could provide much-needed certainty while fostering responsible growth in Web3.
Without supportive policy infrastructure, even projects branded as "DAOs" risk becoming unsustainable or legally vulnerable.
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Frequently Asked Questions (FAQ)
Q: Can a DAO be sued in court?
A: Not directly under current laws. However, individuals or entities managing a DAO may be held accountable if they exercise control or breach fiduciary-like duties.
Q: Do DAO members have legal rights?
A: While not yet firmly established, courts are beginning to recognize that token holders may have enforceable expectations regarding transparency and fair governance.
Q: Are smart contracts legally binding?
A: In many jurisdictions—including Hong Kong—smart contracts may be treated as valid agreements if they meet traditional contract elements: offer, acceptance, consideration, and intent.
Q: Who owns the assets in a DAO?
A: Ownership depends on how funds are held. If controlled by multi-sig wallets linked to identifiable parties, courts may attribute responsibility accordingly.
Q: Can DAOs pay taxes?
A: Since most lack legal personality, tax obligations typically fall on individual participants or associated entities responsible for income generation or distribution.
Q: Is this ruling binding outside Hong Kong?
A: While not precedent-setting internationally, it offers persuasive guidance for other courts facing similar disputes in the Web3 space.
Final Thoughts
The MANTRA case is more than a corporate dispute—it’s a legal milestone signaling that decentralized organizations must still operate within frameworks of accountability. As innovation accelerates, regulators and participants alike must collaborate to build systems that protect rights without stifling creativity.
For builders, investors, and users in the Web3 space, one message is clear: governance matters—and so does compliance.