Recent Scholarship Note: Park on Crypto Associations
Treating Crypto Associations as legal entities
My friend, coauthor, and UCLAW colleague Jim Park has just released a very timely and interesting article arguing that crypto associations—i.e., the “decentralized network of participants who are bound together by economic incentive to collectively run the blockchain”—should be treated as legal entities and not simply as a set of contracts.
Park, James J., Crypto Associations (May 14, 2025). UCLA L. Rev. (forthcoming); UCLA School of Law, Law-Econ Research Paper No. 25-03, Available at SSRN: https://ssrn.com/abstract=5254379 or http://dx.doi.org/10.2139/ssrn.5254379
Park identifies three key categories of players in crypto associations:
Developers create the blockchain and often retain substantial crypto assets, yet deny they owe fiduciary duties to purchasers.
Validators verify transactions based on incentives, not formal contracts.
Purchasers expect profits.
The Big Picture
In evaluating the question of how the respective rights and obligations of the players should be defined and regulated, Park also sheds useful light over the contractualism debate debate and the literature on capital lock-in.
Contractualism: “A contractualist believes that enterprises are the product of negotiations between investors and managers rather than state creations defined through mandatory government rules.” (4)
Capital lock-in: The legal and structural features of corporations whereby the capital contributed by shareholders becomes permanently committed to the firm and cannot be easily withdrawn by individual investors or attached by creditors of investors.
Capital lock-in is closely related to limited liability. Both are means of protecting the entity’s assets. Capital lock-in prevents shareholders from withdrawing their invested capital from the corporation, while limited liability protects shareholders from being personally responsible for the corporation’s debts beyond their investment.
Basic Argument
As to the former, Park contends that courts and regulators like the SEC have increasingly rejected crypto associations’ claims that they owe no duties, classifying them as general or limited partnerships under existing law. This undermines a strict “contractualist” position, which holds that any legal obligations must be voluntarily assumed. (Of course, the SEC’s position on this matter likely will shift now that Paul Atkins—widely regarded as being a crypto ally and proponent—has replaced Gary Gensler—widely regarded as a crypto skeptic if not outright foe—as SEC Chairman.
As to the latter, Park also argues that entities serve a social function beyond contract enforcement: they lock in capital for long-term investment and enable accountability. In lieu of formal entity structures, the article proposes that crypto regulation should designate Developers as "Controllers", obligating them to set aside capital and comply with regulatory standards.
Key Points
“Crypto associations have contended that they owe no contractual or other legal obligation to their investors.” This encapsulates the legal void at the heart of many crypto projects. The Developers’ assertion that economic coordination requires no legal accountability is both radical and risky. It raises a fundamental question about how law adapts to non-traditional, digitally native business structures.
“Courts have often concluded that crypto associations are no different than traditional entities such as general and limited partnerships.” This quote highlights the judicial trend toward grounding blockchain governance in analog legal frameworks. It suggests skepticism of crypto's claims to exceptionalism and that decentralization is not an escape hatch from liability.
“Entities are useful because they segregate capital to ensure it is available to comply with legal obligations imposed by society.” Here, Park extends beyond corporate law orthodoxy (at least as I define it!) to argue that legal entities serve social as well as financial functions. This positions regulation not merely as investor protection, but as a mechanism to ensure accountability and public trust in digital innovation.
“Crypto asset investors may find that their initial investment... can be adversely affected by such [governance] changes.” This passage raises the problem of “midstream governance changes,” which is an argument against contractualism in all business entity forms but seems a particularly challenging risk in crypto. It raises issues of fairness, consent, and investment certainty, spotlighting how mutable governance undercuts core tenets of financial regulation.
“Even without equity, there are ways that Developers can capture part of the value created by a crypto association.” Here Park illustrates the blurred lines between decentralization and de facto control. Developers’ ability to profit without legal obligations exemplifies the asymmetries that courts and regulators are now scrutinizing.
Minor Quibbles
Park’s core premise is that investor protection requires default fiduciary or legal duties, not just informed consent. He thus stands in opposition to the “strong contractualism” view that parties can waive legal protection if they choose. Park assumes some rights and protections (like remedies for fraud or governance abuses) must be non-waivable to preserve fair markets. It would be most interesting to see what sort of arguments a strong contractualist would make in response to Park.
Park argues that courts and regulators are justified in analogizing DAOs and crypto associations to general or limited partnerships. He treats this as a practical and reasonable legal move, despite the conceptual friction. This assumes analogical reasoning can bridge gaps between traditional business entities and code-based collectives.
A Major Quibble
Park proposes creating a federal regulatory scheme that “might condition the sale of crypto assets by a party such as the Developer on taking on Controller status,” with fiduciary duties to Purchasers. (49)
Such regulation should require that the Controller is responsible for issuing an initial set of disclosures when selling crypto assets. The expectation would be that a portion of the funds raised by the Controller must be allocated to such basic compliance. Moreover, disclosure must not be limited to the initial phases of a crypto association, as envisioned by some regulatory models, but must continue periodically.
I’m not a fan of federal regulation in the business organization space. My principal objections thereto are explained at length in Corporate Governance after the Financial Crisis, which critiques Dodd-Frank (and to a lesser extent Sarbanes-Oxley).
As I explain in the conclusion thereto:
. . . the federal role in corporate governance appears to be a case of what Robert Higgs identified as the ratchet effect. Higgs demonstrated that wars and other major crises typically trigger a dramatic growth in the size of government, accompanied by higher taxes, greater regulation, and loss of civil liberties. Once the crisis ends, government may shrink somewhat in size and power, but rarely back to pre-crisis levels. Just as a ratchet wrench works only in one direction, the size and scope of government tends to move in only one direction—upwards—because the interest groups that favored the changes now have an incentive to preserve the new status quo, as do the bureaucrats who gained new powers and prestige. Hence, each crisis has the effect of ratcheting up the long-term size and scope of government.
We now observe the same pattern in corporate governance. As we have seen, the federal government rarely intrudes in this sphere except when there is a crisis. At that point, policy entrepreneurs favoring federalization of corporate governance spring into action, hijacking the legislative response to the crisis to advance their agenda. Although there may be some subsequent retreat, such as Dodd-Frank’s § 404 relief for small reporting companies, the overall trend has been for each major financial crisis of the last century to result in an expansion of the federal role.
There are three major reasons why federal intervention in corporate governance—especially when it takes the form of bubble laws (i.e., laws developed in response to a financial crisis—tends to be ill conceived.
First, federal bubble laws tend to be enacted in a climate of political pressure that does not facilitate careful analysis of costs and benefits. Second, federal bubble laws tend to be driven by populist anti-corporate emotions. Finally, the content of federal bubble laws is often derived from prepackaged proposals advocated by policy entrepreneurs skeptical of corporations and markets.
The problem is compounded because the supremacy of federal law and the uniform opposition of Congress and the SEC to private ordering eliminates opportunities for experimentation with alternative solutions to the many difficult regulatory problems that arise in corporate law. As Justice Brandeis pointed out many years ago, “It is one of the happy incidents of the federal system that a single courageous State may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of country.” So long as state legislation is limited to regulation of firms incorporated within the state, as it generally is, there is no risk of conflicting rules applying to the same corporation. Experimentation thus does not result in confusion, but instead may lead to more efficient corporate law rules.
In contrast, the uniformity imposed by federal law precludes experimentation with differing modes of regulation. As such, there will be no opportunity for new and better regulatory ideas to be developed—no “laboratory” of federalism. Likewise, the persistent refusal to accommodate private ordering eliminates solutions from emerging from competition in the market. Instead, the federalization of corporate governance has resulted in rules that were wrong from the outset or may quickly become obsolete, but are effectively carved into stone with little prospect for change.
To be sure, as Park correctly points out, such as Wyoming have provided what Chris Brummer and Rodrigo Seria call “entity wrappers” for crypto associations, but they do not appear to be widely used.” (42) But even though Wyoming deserves some credit for being the birthplace of the limited liability company (LLC), relying on states like Wyoming to do the job is like relying on an intramural flag football team to take on the Kansas City Chiefs. Despite all the bemoaning about DExit, Delaware is still entity law’s 800 pound gorilla. Let’s see what she can do.
I would be interested in seeing someone work out a competing proposal that would develop a state level entity appropriate for crypto associations and then a reply from Park explaining why federal law would be preferable.
Conclusion
This article addresses a critical legal gap in the rapidly evolving world of blockchain governance: how to hold decentralized crypto associations accountable in the absence of formal legal entities or contracts. Park rigorously examines how courts are beginning to impose traditional business entity frameworks—like general and limited partnerships—onto blockchain networks, particularly when Developers and Validators retain substantial control or profit.
Its significance lies in two key contributions:
It challenges the myth of decentralization as immunity from legal duties by showing that courts and regulators increasingly view crypto associations as de facto business entities.
It offers a forward-looking regulatory proposal: designating Developers as “Controllers” with legal obligations, bridging the gap between technological innovation and societal accountability.
By integrating corporate theory, securities law, and judicial precedent, the article provides a foundational framework for understanding and regulating decentralized finance in a way that protects investors and ensures legal responsibility.
Highly recommended.