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"

Original Author: Will; Wang

Original source: Web3 Little Law

Summary

• CFTC v. Ooki DAO; case, due to; Ooki DAO; unanswered, CFTC; landslide victory, court decision; ,;542;fine

• The judge agrees; CFTC; to define; DAO; as an unincorporated organization, thus; DAO;

• After "DAO" can be sued, the chain is no longer a place outside the law, and regulatory law enforcement agencies can use this as a breakthrough to supervise the "DAO, DeFi, DEX" projects on the chain

• On the chain; DAO =; unincorporated association (Unincorporated Association) =; all participating governance members may bear the joint and several liability of; DAO;

One, CFTC;

On June 9, 2023, the U.S. Commodity Futures Trading Commission (CFTC) announced that it had won a "Sweeping Victory" against the "Ooki DAO" at the judicial level. It has created an unprecedented precedent to assume legal responsibility for the subject of the lawsuit.

In the case of; CFTC v. Ooki DAO;, the judge of California, USA made the "no-suit judgment" in the;2023;6;month;8; Illegal Trading Platform (Illegal Trading Platform) and unlawfully acting as a futures commission merchant (Unlawfully Acting as a Futures Commission Merchant (FCM)) and bear civil liability, and impose a fine of; $;643,;542; and order the permanent closure;Ooki DAO ; website and remove its content from the Internet.

Crucially, in this precedent-setting judgment, the court held that "Ooki DAO" is a "Person" under the definition of the U.S. Commodity Exchange Act, and can be regarded as the subject of the lawsuit to bear corresponding legal liabilities. "This ruling should serve as a wake-up call for those who believe they can circumvent the law by adopting the 'DAO' structure with the intention of exempting it from regulatory enforcement and ultimately putting the public at risk," CFTC; officials said.

This judgment is very important for "DAO" and "DeFi" project parties: (1;) the court defines "DAO" as an actionable subject (Person), and the chain is no longer a place outside the law. This is a breakthrough to supervise the projects on the chain; DAO, DeFi, DEX; (2;) On the chain; DAO; in terms of legal attributes; CFTC; Acceptance means that members participating in;DAO;governance will likely assume joint and several legal responsibilities of;DAO;.

2. Ooki; case details

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, and does not No sale of actual virtual assets is involved.

The bZx;protocol was originally developed and maintained by;bZeroX LLC; and its founders, and on approximately;August;23;2021;, bZeroX LLC;transferred control of the;bZx;protocol to the;bZx DAO (finally changed its name to Ooki DAO on November 18, 2021), from then on, Ooki DAO; can only be governed by votes of 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 regulation and accountability.” Apparently;CFTC;did not agree.

On September 22, 2022, CFTC took two enforcement actions against; Ooki DAO: (;1); punished; bZeroX LLC; (;2); filed a lawsuit against; Ooki DAO; on the grounds that; Ooki DAO (i); illegally provided off-exchange leverage and margin retail commodity transactions; (ii); engaged in futures trading (FCM) without registration; and ( iii) Failure to comply with the requirements under the Bank Secrecy Act; FCM;; KYC; Verification and Customer Identification Procedures (CIP). The court then approved the notification and service of subpoenas to the members of the "Ooki DAO" and "DAO" through forum chatbots; bot; and forum post announcements.

Subsequently, Paradigm, a16z, DeFi Education Fund (UniSwap; support), LeXpunK_Army (Yearn, Curve & Lido; support), these; 4; In solidarity with the;Ooki DAO, stated that it is unreasonable for the;CFTC;to require the;DAO;members/token holders to bear the responsibility of the;DAO; simply through a governance vote. a16z;'s General Counsel; Miles Jennings; further stated that the focus should be on those members who voted on the governance of the "DAO;" illegal behavior rather than the entire;DAO; members.

After the "Ooki DAO" missed the "2023";1; Defending oneself in court may also be a "strategic" abandonment, obviously no "DAO" members are willing to bear the "CFTC" accountability.

On June 8, 2023, the California judge finally made a "no judgment" against the "CFTC" in favor of the lawsuit, which means that the "CFTC" does not need to prove its reasons for the allegations against the "Ooki DAO". Ooki DAO; Although there are many solidarity, but in the face of no one to respond to the situation, it has opened a bad start for the supervision of the "DAO" by the regulator.

CFTC; Chairman; Rostin Behnam; believes that; Ooki DAO; is an obvious case of fraud, the organizers are suspected of trying to evade; He describes the "DAO" as a unique technology, but that doesn't exempt the "DAO" from regulatory frameworks at the state or federal level.

Three, CFTC; the impact and consequences of winning the lawsuit

Since the "Ooki DAO" did not respond to the lawsuit, the California judge basically agreed to all of the "CFTC"'s demands, and the CFTC; did not need to make any explanations for its demands. Since the United States is a country of case law, this judgment is bound to have a huge impact on the encryption world: define "DAO" as an actionable subject, and from then on, the chain is no longer a place outside the law. Regulatory law enforcement agencies can use this case as a breakthrough. ;DAO, DeFi, DEX; projects are supervised; at the same time, members participating in ;DAO; governance will likely bear joint and several legal responsibilities of ;DAO;.

3.1; On the chain; DAO; is no longer a place outside the law

In the "CFTC" official website; "Digital Assets" column, all virtual assets, including all virtual currencies, are classified as "commodities", which will give "CFTC" the right to trade derivatives in the virtual asset futures market, as well as virtual asset spot However, the CFTC; has no authority to regulate virtual asset transactions in spot markets that do not involve margin, leverage, or financing.

Before the transformation of "bZeroX LLC" into "DAO", there is no doubt that "bZeroX" and its founders shall bear the corresponding legal responsibility for violations. It is worth noting that the California judge agreed; CFTC; to define "Ooki DAO" as an "unincorporated association (Unincorporated Association)", which is an actionable subject (Person) under the Commodity Exchange Act and can be sued and bear legal responsibility.

This means that after this case, the CFTC will have the right to supervise and file lawsuits against projects such as DAO and DeFi that are engaged in the virtual asset futures derivatives market. It is estimated that decentralized derivatives exchanges such as dYdX and Synthetix are trembling? What is even more frightening is whether the SEC can use this judgment to directly target those project parties and decentralized exchanges (DEX) that the "SEC" considers "issuing and selling unregistered securities" for administrative enforcement?

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3.2 DAO; members may need to bear the joint and several legal responsibilities of;DAO;

Although the punishment judged by the judge is only for "Ooki DAO", but; "CFTC" according to the federal law and a series of state-related partnership law cases, it is determined that the members of the profit-making (For Profit) unincorporated organization need to be personally responsible for the organization's actions Joint and several liability, which means that members participating in; Ooki DAO; governance will be exposed to risks that require joint and several personal liability. It is not yet known how the CFTC will carry out the enforcement of the fine.

This is fatal for a ;DAO; unlike a legal entity such as an ;LLC; or a ;Corp; being able to separate the liability of the legal entity from that of the individual. CFTC; compares; bZeroX LLC; . Therefore, CFTC; said: Once; OOKI Token; token holders influence the results of the governance proposal through governance token voting, then the; OOKI Token; token holders can be identified as voluntary participation ;Ooki DAO; governance entails personal responsibility for the actions of the ;DAO;.

3.3; The supervision of "DeFi" has opened up new ideas

After the U.S. regulators imposed sanctions on currency mixers; DeFi; protocols; Tonardo Cash; in August 2022, the U.S. regulators 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, which means that all U.S. individuals or entities are prohibited from trading with "Tonardo Cash" or the wallet address bound to the agreement. And "Ooki DAO" goes a step further. US supervision directly requires relevant servers to shut down the "Ooki DAO" website and delete online content on the grounds of "DAO" business violations of laws and regulations, prohibiting "Ooki DAO" from conducting any business in the United States.

On April 6, 2023, the U.S. Department of the Treasury released the "2023 DeFi" Illegal Financial Activities Assessment Report, which is the world's first "DeFi"-based assessment report on illegal financial activities. The report recommends strengthening U.S.; AML/CFT; regulation and, where possible, enforcement of virtual asset activities (including; DeFi; services) to improve compliance of virtual asset service providers with "BSA; obligations . It can be seen that the U.S. regulation also follows this idea, supervising the deposit and withdrawal business of virtual assets from the perspective of "AML/CTF", so as to achieve source control, and then supervise the compliance of the business of specific projects from the perspective of investor protection.

4. Solution - Legal Wrapper of DAO

Obviously, "CFTC" can use this case to tear away the barrier of the extrajudicial place on the chain, so the chain is no longer an extrajudicial place. However, legal wrapping (Legal Wrapper) for decentralized; DAO, DeFi; projects to protect the limited liability of members is already a must, not an option.

DAO;'s Legal Wrapper (Legal Wrapper) is a collection of legal frameworks or legal entities specific to;DAO; that provide recognized legal status in relevant jurisdictions for;DAO;. Its essence is to "package" DAO in a legal framework, so that "DAO" can be linked with the traditional legal system, while ensuring compliance with relevant laws and regulations, protecting "DAO" members' limited liability, and opening up; DAO ; a bridge to interact with the real world.

Failure to register; The DAO; founders and members 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 the;DAO; is recognized as a general partnership, then each member of the;DAO; All assets and liabilities bear personal joint and several legal liabilities. A registered "DAO" can be used as a separate legal entity. On the one hand, it can meet the compliance requirements of the place of registration and other jurisdictions, and more importantly, it can provide "DAO" members with limited liability similar to the form of corporate organization.

B.; Tax risk. The DAO; members could face fines or other penalties if they fail to pay their income taxes. And 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 issues involving securities compliance, AML/CTF; compliance , Administrative and criminal investigation of financial crimes.

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; 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 business model, legal needs and preferences of the "DAO", and there are usually three main criteria for judging:

(1;) DAO; Do you want to generate income and distribute income to members?

(2;) DAO; degree of decentralization;

(3;) DAO; Will tokens be issued in the future?

Five, write at the end

After the U.S. regulators recovered from the "FTX" incident, in the first quarter of 2023, many major players in the encryption world, such as; Coinbase, Kraken, Paxos, Silvergate Bank, Signature Bank, Justin Sun, Binance; conducted regulatory enforcement activities. Especially recently, "SEC" chose to challenge "Coinbase and Binance" at the same time, and listed some of the tokens on their shelves as "securities", while "CFTC" has torn apart the barriers of the encryption world , making the world on the encryption chain close to;12,;745;DAO;organizations and their;$;200;billion virtual assets exposed to the guns of the;CFTC;.

DAO, DeFi, DEX; project parties especially need to be vigilant! ;