CFTC wins lawsuit against Ooki DAO, setting a precedent for DAO to assume legal liability
Original title: "CFTC wins lawsuit against Ooki DAO, setting a precedent for DAO to be held legally liable"
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Summary
- CFTC v. Ooki DAO case, since Ooki DAO has no respondent, CFTC won a landslide victory, the court ordered Ooki DAO to stop operating in the United States + shut down the website to delete content + $ 643, 542 fine
- The judge agreed with CFTC to define DAO as an unincorporated organization, so DAO can bear legal responsibility as the subject of the lawsuit
- After DAO can be sued, the chain is no longer a place outside the law. Regulatory law enforcement agencies can use this as a breakthrough to supervise DAO, DeFi, and DEX projects on the chain
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1. CFTC's victory
On June 9, 2023, the U.S. Commodity Futures Trading Commission (CFTC) announced that it had won a "Sweeping Victory" against Ooki DAO at the judicial level, creating an unprecedented legal liability for DAO as the subject of the lawsuit precedent.
In the case of CFTC v. Ooki DAO, the California judge made a "non-suit judgment" in favor of the CFTC on June 8, 2023. The judge ruled that Ooki DAO was guilty of operating an illegal trading platform (Illegal Trading Platform) and illegally serving as futures commissions. Merchant (Unlawfully Acting as a Futures Commission Merchant (FCM)) and was fined $643,542 and ordered to permanently shut down Ooki DAO's website and remove its content from the Internet.
Crucially, in this precedent-setting decision, the court held that Ooki DAO is a “person” under the definition of the U.S. Commodity Exchange Act, and can be subject to corresponding legal liabilities as the subject of the lawsuit. “This decision should serve as a wake-up call for those who believe they can circumvent the law by adopting a DAO structure, intending to avoid regulatory enforcement and ultimately put the public at risk,” CFTC officials said.
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2. Details of the Ooki case
The bZx protocol is a blockchain-based decentralized DeFi protocol that allows users to provide virtual assets as collateral to establish leveraged positions for transactions. The value of the transaction is determined by the price difference between the two virtual assets without involving actual Sale of Virtual Assets.
The bZx protocol was originally developed and maintained by bZeroX LLC and its founders, and on or about August 23, 2021, bZeroX LLC transferred control of the bZx protocol to the bZx DAO (eventually renamed Ooki DAO on November 18, 2021) ), from then on, Ooki DAO can only be governed by the votes of OOKI Token token holders. The CFTC quoted one of the founders of the bZx protocol as saying at the time: “Transitioning to a DAO would exempt the bZx protocol from legal oversight and accountability.” Apparently the CFTC disagreed.
On September 22, 2022, the CFTC took two enforcement actions against Ooki DAO: (1) sanctioned bZeroX LLC and the founders of the bZx protocol, which resulted in a settlement; (2) filed a lawsuit against Ooki DAO on the grounds that Ooki DAO ( i) illegally offering off-exchange leveraged and margined retail merchandise transactions; (ii) engaging in futures trading (FCM) without registration; and (iii) failing to perform KYC verification and client identification procedures as required by FCMs under the Bank Secrecy Act (CIP). The court then approved the notification and service of subpoenas to Ooki DAO and DAO members through forum chatbot bots and forum post announcements.
Subsequently, the four Web3 institutions, Paradigm, a16z, DeFi Education Fund (supported by UniSwap), and LeXpunK_Army (supported by Yearn, Curve & Lido), all submitted Amicus Briefs to the court to support Ooki DAO, saying that CFTC only passed It is unreasonable to hold DAO members/token holders accountable for the DAO just by governance voting. Miles Jennings, general counsel of a16z, further stated that the focus should be on those members who voted on the governance of the DAO’s illegal behavior rather than the members of the entire DAO.
After Ooki DAO missed the deadline for responding in January 2023, the CFTC began to apply to the court for a "non-suit judgment" in the case, which means that Ooki DAO failed to defend itself in court, and it may also be A "strategic" abandonment, obviously no DAO member is willing to bear the responsibility of CFTC.
On June 8, 2023, a judge in California, USA, finally made a "non-suit judgment" in favor of the CFTC, which means that the CFTC does not need to demonstrate the reasons for its allegations against Ooki DAO. Although Ooki DAO has a lot of solidarity, facing the situation that no one responds to the lawsuit, it opened a bad start for the regulators to supervise the DAO.
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3. The impact and consequences of CFTC’s victory
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3.1 DAO on the chain is no longer an extralegal place
The column on the CFTC official website Digital Assets classifies all virtual assets, including all virtual currencies, as "commodities", which will give the CFTC the right to deal with derivatives transactions in the virtual asset futures market, as well as fraud and market fraud in the virtual asset spot market. However, the CFTC has no authority to regulate virtual asset transactions in the spot market that do not involve margin, leverage, or financing.
Before bZeroX LLC was transformed into a DAO, bZeroX and its founders should bear the corresponding legal responsibility for violations, beyond doubt. It is worth noting that the California judge agreed with the CFTC to define Ooki DAO as an "unincorporated association (Unincorporated Association)", which is an actionable subject (Person) under the Commodity Exchange Act and can bear legal responsibility as a sued subject .
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(https://www.bitstamp.net/learn/web3/what-is-a-decentralized-exchange-dex/)
3.2 Members of DAO may need to bear the joint and several legal liabilities of DAO
Although the punishment judged by the judge is only for Ooki DAO, according to the federal law and a series of state-related partnership law cases, the CFTC has determined that members of profit-making (For Profit) unincorporated organizations need to bear personal joint and several liabilities for the organization's actions. It means that members participating in the governance of Ooki DAO may be exposed to the risk of joint and several personal liability. It is not yet known how the CFTC will proceed with the enforcement of the fine.
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3.3 The regulation of DeFi has opened up ideas
Following the U.S. regulatory agency’s sanction against the currency mixer DeFi protocol Tonardo Cash in August 2022, the U.S. regulatory agency has further expanded the regulatory dimension of DeFi projects on the chain. For Tonardo Cash, U.S. regulators put it on the SDN list for terrorist money laundering, meaning that all U.S. individuals or entities are prohibited from trading with Tonardo Cash or wallet addresses tied to the protocol. And Ooki DAO went a step further. The U.S. regulator directly asked the relevant server to close the Ooki DAO website and delete online content on the grounds that the DAO business violated laws and regulations, and prohibited Ooki DAO from conducting any business in the United States.
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4. Solution - Legal Wrapper of DAO
Obviously, the CFTC can use this case to tear away the barrier of the extra-legal place on the chain, so the chain is no longer an extra-legal place. Legal wrapping (Legal Wrapper) for decentralized DAO and DeFi projects to protect the limited liability of members is already a must, not an option.
A DAO's legal wrapper (Legal Wrapper) is a DAO-specific legal framework or collection of legal entities that provide DAOs with recognized legal status in relevant jurisdictions. Its essence is to "package" DAO within a legal framework, so that DAO can be linked with the traditional legal system, while ensuring compliance with relevant laws and regulations and protecting the limited liability of DAO members, it also opens up a bridge for DAO to interact with the real world .
Founders and members of unregistered DAOs face legal risks, in particular:
A. Risk of Legal Liability. Just like Ooki DAO, an unregistered DAO can be regarded as a general partnership (General Partnership). Once a DAO is recognized as a general partnership, each member of the DAO may be jointly and severally liable for all assets and liabilities of the DAO responsibility. A registered DAO can act as a separate legal entity. On the one hand, it can meet the compliance requirements of the place of registration and other jurisdictions. More importantly, it can provide DAO members with limited liability similar to the form of corporate organization.
B. Tax risk. DAO members may face fines or other penalties if they fail to pay their income taxes. A registered DAO can conduct a series of mature tax declarations according to its organizational form, as well as meet the tax compliance requirements of relevant jurisdictions.
C. Financial Compliance Risk. In the absence of relevant KYC/AML/CTF verification procedures to check the source of funds, absorbing funds or engaging in economic activities in the anonymized blockchain world may face securities compliance, AML/CTF compliance, financial crimes administrative and criminal investigations.
DAO legal entities can be registered as different organizational forms: Foundations, Associations, Non-Profit LLC or For-Profit LLC.
The actual choice of organizational form and jurisdiction depends on the DAO type (community/protocol, service, investment), business model, token functionality, and other factors.
When deciding in which jurisdiction to set up a DAO, it all depends on the DAO's business model, legal needs and preferences, and there are usually three main criteria for judging:
(1) Does DAO want to generate income and distribute income to members?
(2) The degree of decentralization of DAO;
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5. Write at the end
After the U.S. regulators recovered from the FTX incident, they conducted regulatory enforcement against many major players in the encryption world, such as Coinbase, Kraken, Paxos, Silvergate Bank, Signature Bank, Justin Sun, and Binance, in the first quarter of 2023 Activity. Especially recently, the SEC has chosen to challenge the two major crypto giants, Coinbase and Binance, at the same time, and has listed some of the tokens on their shelves as "securities." Nearly 12,745 DAO organizations and their $20 billion in virtual assets were exposed under the guns of the CFTC.
DAO, DeFi, and DEX project parties especially need to be vigilant!
