CFTC Ooki DAO Enforcement Action Update: Commission Responds | Proskauer – Blockchain and the law
On September 22, 2022, the CFTC announced an order simultaneously filing and settling charges against bZeroX, LLC (“bZeroX”) and its creators for illegally offering leveraged and margined retail trades on digital assets, operating as an unregistered forward commission merchant and failing to perform KYC on its clients. According to the CFTC, a month prior to this settlement announcement, bZeroX transferred control of the bZx protocol to bZx DAO, a Decentralized Autonomous Organization (“DAO”), which later renamed itself Ooki DAO. On the same day that the bZeroX regulations were announced, the CFTC filed a lawsuit against the Ooki DAO (bZeroX successor) for violating those same regulations. The CFTC said bZeroX and its creators were engaging in this illegal activity in connection with their blockchain-based decentralized software protocol that operated similarly to a trading platform. Trades executed on bZeroX, and then on the Ooki DAO, had to take place on a registered designated contract market. In addition, the complaint claimed that bZeroX and Ooki DAO operated as unregistered futures commission merchants by soliciting and accepting customer orders, accepting cash or goods as margin, and extending credit. .
The structure of Ooki DAO and the CFTC’s enforcement action against the DAO itself has attracted much media attention (and industry backlash) and raised new legal issues.
A DAO is a decentralized autonomous organization where token holders, here Ooki “governance” token holders, have the ability to vote on DAO governance decisions. Specifically, the CFTC alleged that the Ooki DAO is an “unincorporated association” made up of “holders of Ooki tokens who have voted to have those tokens govern the Ooki Protocol.” The CFTC sued the Ooki DAO, arguing implicitly that because token holders participated in the governance of the DAO, they could be personally liable for its actions. In response to the CFTC’s actions, several interested parties have filed amicus briefs or asked the CFTC to enact rules to clarify the obligations of those participating in a DAO and avoid crippling innovations in software development.
For example, on October 31, 2022, Haun Ventures, a venture capital firm, petitioned the CFTC to enact a rule limiting the scope of liability of DAO participants. The petition called for more “clarity and certainty” from the Commission on the obligations and responsibilities of individual participants in the DAO. Haun Ventures claimed that the CFTC’s action against Ooki DAO has had a chilling effect on DAOs in general and discourages the participation of good players. Further, Haun Ventures argued that the CFTC’s action against Ooki DAO goes beyond the Commission’s mandate by creating liability even for DAO participants who do not “actively engage in or engage in illegal activities”. not facilitate”. Other interested parties also objected to the CFTC’s “expanding” liability theory, which would “trap” token holders who had no part in the decisions that contributed to the alleged DAO violations.
In the petition, Haun Ventures recommended a new rule limiting liability to DAO token holders who actively engage in or facilitate a violation of the Commodities Exchange Act and CFTC regulations. Accountability would require actively voting for, or otherwise supporting, the underlying proposition or action that results in a violation. The petition from Haun Ventures states that such a rule would have a positive impact on the governance of the DAO by clarifying that token holders can vote on the proposals without holding themselves accountable for all future actions of the DAO.
The amicus briefs also objected to the unconventional and novel method by which the CFTC served the subpoena and complaint on Ooki DAO. As the Ooki DAO is made up of anonymous users (who may or may not reside in the United States), the CFTC noted that there are “significant obstacles to the traditional meaning of the procedure” and asked the court to authorize the Commission to serve the subpoena and complaint on the Ooki DAO via what the CFTC has identified as the “method that the Ooki DAO itself offers to communicate with it.” On October 3, 2022, a California District Court granted the CFTC’s motion to perform substitute service against Ooki DAO and approved that the CFTC serve the summons and complaint via the “Help Chat Box” on Ooki DAO’s website. ‘Ooki DAO and also publish notice of summons and complaint. on the “Ooki DAO Online Forum”. (CFTC vs. Ooki DAO, no. 22-5416 (ND Cal. 3 Oct. 2022)). Since the CFTC provided the documents in this manner on September 22, 2022, the court held that the Commission had effectively served the Ooki DAO on that date.
Following the alternative service ruling, the court received a request to file an amicus brief expressing concerns about the alternative service order, which it granted, as well as other friend requests; Subsequently, an analysis of the record shows that the court has set December 7, 2022 as the date for a hearing on the reconsideration of the alternative service order. Broadly speaking, the amicus briefs argue that a DAO is not like a traditional business entity where notification to the central organization is sufficient for due process and there is no legal basis. to declare that a DAO is a “person” under the Commodity Exchange. Law (which includes “associations” under this definition). The memoirs further claim that DAO token holders are not required to participate in the Ooki DAO online forum and that a DAO is by definition decentralized and that online forum posting and the help chat associated with the DAO will not necessarily provide an “actual review”. to all potential defendants as required by law. The amici argue that if the CFTC wishes to hold individuals accountable for violations of CFTC regulations, it should identify the individuals who violated the regulations and provide appropriate procedural service.
In response, on November 14, 2022, the CFTC filed a consolidated opposition to amicus briefs on this issue, arguing that the court should not reconsider its order confirming service, as the CFTC’s method of service followed applicable law. and resulted in an effective notice. On this issue, the CFTC argues that the law does not require it to serve all members of an unincorporated association, which it considers to be the Ooki DAO, to effect service of process. Overall, the CFTC argues that the Ooki DAO meets the “well-established definition of an unincorporated association” and strongly disagrees with the amici’s characterization of this action:
“The CFTC is not suing the technology…the CFTC’s action is not against the blockchain-based Ooki protocol, but against the Ooki DAO, an association that acts and makes collective decisions regarding the Ooki protocol voting by its governance token holders.”
In its opposition papers, the CFTC clarified its intentions and commented on the uproar around the possibility of joint and several liability for members of Ooki DAO. He reiterated that he had not sued any individual member of Ooki DAO (listing only the unincorporated association of Ooki DAO, and not any individual member of Ooki DAO, as a defendant), and the Nor did the complaint request that the court enter judgment against an individual member of Ooki DAO on the basis of that member’s joint and several liability for judgment against the Ooki DAO. As the CFTC explained in its opposition materials, in the hypothetical event that the CFTC seeks and obtains a monetary judgment against the Ooki DAO, the CFTC could only enforce that judgment against the assets of the Ooki DAO. ‘Ooki DAO.
With many potential legal issues wrapped up in a motion to reconsider procedural alternative service on the Ooki DAO, we’ll be watching closely to see how the court rules.