The CFTC is suing the DAO. Here’s Why DeFi Users Are Worried

Important fast food

  • The CFTC has filed a lawsuit against the decentralized independent organization behind the Ooki protocol, Ooki DAO, for operating an illegal derivatives trading platform.
  • The lawsuit marks the first time that a government agency has charged non-governance token holders of the decentralized blockchain protocol for allegedly violating the law.
  • The case could set a terrible legal precedent for holders of DAOs and ruling DeFi tokens.

In the lawsuit, the CFTC argued that “DAOs are not immune to enforcement and may not violate the law with impunity.”

CFTC sues Ooki DAO in Landmark case

The CFTC launched a controversial attack on the DAO, which could have serious consequences for DeFi.

In a press release Thursday, the US government agency announced that it had simultaneously completed and settled charges against the former operators of the bZx protocol (later renamed Ooki Protocol), bZeroX, LLC, and its founders, Tom Bean and Kyle Kistner.

In the settlement, the CFTC alleged that by designing, implementing and marketing bZx — a decentralized smart contract-based protocol for margin trading — without registering with the agency, the defendants illegally operated a Defined Contract Market (DCM), registered Activities Only Futures Commission Merchants (FCMs) can and fail to perform mandatory Know Your Customer (KYC) duties on platform users.

The CFTC also filed a federal civil enforcement action against the Ooki DAO – a decentralized independent organization that then assumed administrative control of the Ooki Protocol – under the same allegations. The case is significant because it is the first time a regulator has sued the DAO and because the legal implications of the CFTC winning the case could set a dire legal precedent for holders of governance tokens for other crypto projects, including many of the DeFi protocols.

In the lawsuit, the CFTC defined the Ooki DAO as an “unincorporated association” consisting of BZRX token holders “who vote on those tokens to govern (for example, to modify, operate, market and take other actions in connection with the) bZx-protocol.” The agency claims That the founders of bZx, Bean and Kistner, transferred control of the protocol to the community in an attempt to break the rules. He Said:

“bZeroX’s main goal in transferring control of the bZx (now Ooki protocol) to the bZx DAO (now Ooki DAO) was to try to make the bZx DAO, through its decentralized nature, feasible. Simply put, the bZx founders thought they had identified a way to break the law and regulations, as well as to other laws, without consequences.”

The CFTC concluded that “the founders of BZx were wrong,” arguing that “DAOs are not immune to enforcement and may not violate the law with impunity.”

Consequences for DeFi Token Holders

By designating the DAO as an unincorporated association, the CFTC has effectively declared that its members have unlimited liability and are fully responsible for all of its actions. This argument is particularly troubling given that the regulator did not care that the Ooki protocol is a decentralized, non-freedom protocol backed by smart contracts. As such, existing rules designed for central financial entities cannot be followed, nor can they be closed by DAO members or any other party.

The CFTC winning the case in court would set a legal precedent that could make it easier for the agency to target other decentralized derivatives trading protocols such as Synthetix, GMX, dYdX, Injective, Gains Network and Perpetual Protocol. Should this ever happen, holders of SNX, GMX, DYDX, INJ, GNS, and PERP tokens who voted on any governance proposals could be liable and subject to prosecution for potentially illegal activities of the protocol.

Several prominent figures in the crypto community have criticized the CFTC over the lawsuit. according to General Counsel and Head of Decentralization at well-known venture capital firm Andreessen Horowitz, Myles Jennings, the critical issue in the CFTC case is that the agency “is trying to file a [Commodities Exchange Act] To protocol and DAO at all. Issued in 1936, nearly half a decade before the invention of the Internet, the CEA was designed to regulate the trading of commodities and derivatives on centralized markets, and thus cannot – in its current form – be suitable for regulating trading platforms based on noncustodial software . . .

Jake Chervinsky, attorney and policy director at the Blockchain Association, He said That move “could be the most egregious example of regulatory oversight in crypto history.” “We have long complained that the SEC is abusing these tactics, but the CFTC shamed them,” he added.

The CFTC’s move comes after the crypto legal community demonstrated overwhelming support for the agency’s renewed push to become the primary regulator of cryptocurrency. In August, U.S. Senators Debbie Stabeno (Michigan), John Bozeman (R-R), Cory Booker (D-NJ), and John Thune (Republic-SD) introduced the Digital Goods Consumer Protection Act, which aims to fill in the loopholes. In legislation between state and federal regulation of cryptocurrency. If passed, the DCCPA would make the CFTC the primary regulator of cryptocurrencies that are not considered securities.

In light of its many negative experiences with the Securities and Exchange Commission, the crypto industry has largely embraced the DCCPA as a bill that could take the securities regulator off its back and offer some much-needed regulatory clarity. However, the CFTC, with its latest enforcement action, appears to have wiped out any fame it previously gained from industry stakeholders, and driven public alienation from one of its commissioners, Summer K Mersinger.

CFTC’s prospects for winning

Notably, Commissioner Mersinger published a dissenting statement opposing the CFTC’s approach in the Ooki DAO case. Specifically, he objected to the agency’s approach to assigning liability to DAO token holders based on their participation in a board vote. “This approach arbitrarily defines an unregistered Ooki DAO in a way that unfairly selects winners and losers, and undermines the public interest by discouraging good governance in this new crypto environment,” he said.

Furthermore, Mersinger argued that the approach does not rely on any statutory authority granted in the CEA or relevant case law, represents undesirable “regulation through enforcement” and ignores established precedents for determining liability in similar violations.

Commenting on the issue on Twitter, former Deputy Assistant Attorney General at the Department of Justice and current head of global regulatory affairs at ConsenSys, William Hughes, He said that “the court would have to agree with the CFTC on theories of DAO liability for a token to make sense. It would not be easy” for the CFTC to persuade any court, noting that a lawsuit may not be sensational To worry as it first appeared.

The CFTC’s argument is clearly on very shaky ground, and the agency will likely struggle to win the case in a landslide – assuming bZeroX, LLC and its founders have adequate defenses. If the CFTC loses the case, it should set a very promising legal precedent for DAOs and governance token holders.

Disclosure: At the time of writing, the author of this feature owns ETH and several other cryptocurrencies.

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