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 margin commodity transactions in digital assets, operating as an unregistered futures commission dealer and fail. to carry out KYC on its customers. According to the CFTC, one 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 settlement was announced, the CFTC filed an enforcement action against Ooki DAO (successor to bZeroX) for violating the same rules. The CFTC stated that bZeroX and its creators engaged in this illegal activity in connection with their decentralized blockchain-based software protocol that operated in a manner similar to a trading platform. The transactions carried out on bZeroX, and subsequently on the Ooki DAO, were required to take place on a registered designated contract market. In addition, the complaint alleged that bZeroX and Ooki DAO operated as unregistered futures commission dealers by soliciting and accepting orders from customers, accepting money or property as margin, and providing credit.

The structure of the Ooki DAO, and the CFTC’s enforcement actions against the DAO itself, have received much media attention (and industry reaction) and raised new legal questions.

A DAO is a decentralized autonomous organization where token holders, here Ooki “governance” token holders, have the ability to vote on governance decisions of the DAO. Specifically, the CFTC claimed that the Ooki DAO is an “unincorporated association” made up of “Ooki Token holders who have voted those tokens to govern the Ooki Protocol.” The CFTC filed the lawsuit against the Ooki DAO, implicitly arguing that because token holders participated in the DAO’s governance, they could be personally liable for its actions. In response to the CFTC’s actions, several interested parties have either filed amicus briefs or petitioned the CFTC to craft rules to clarify the obligations of individuals participating in a DAO and avoid chilling innovations in software development.

For example, on October 31, 2022, Haun Ventures, a venture capital firm, petitioned the CFTC to promulgate a rule limiting the scope of DAO participants’ liability. The petition asked for more “clarity and certainty” from the commission about the obligations and liabilities of individual DAO participants. Haun Ventures argued that the CFTC’s action against Ooki DAO has had a chilling effect on DAOs in general and prevents good actors from participating. Furthermore, Haun Ventures argued that the CFTC’s action against the Ooki DAO goes beyond the commission’s mandate by creating liability even for DAO participants who do not “actively engage in or facilitate illegal activity.” Other interested parties have also objected to the CFTC’s “expansive” theory of liability, which would “spin” token holders who did not participate in the decisions that contributed to the DAO’s alleged violations.

In the petition, Haun Ventures recommended a new rule that limits liability to DAO token holders who actively engage in or facilitate violations of the Commodity Exchange Act and CFTC regulations. Liability would require actively voting for, or otherwise supporting, the underlying motion or action that results in a violation. Haun Ventures’ petition says such a rule would have a positive impact on DAO governance by clarifying that token holders can vote on proposals without being held responsible for all future actions of the DAO.

The amicus briefs have also objected to the unconventional and novel method by which the CFTC served the subpoena and complaint on the Ooki DAO. As Ooki DAO is comprised of anonymous users (who may or may not be US residents), the CFTC noted that there are “significant obstacles to traditional service” and requested that the court permit the Commission to serve the subpoena and complaint on Ooki DAO via what the CFTC identified as “the method Ooki DAO itself endures to communicate with it.” On October 3, 2022, a California district court granted the CFTC’s motion to institute alternative service against Ooki DAO and authorized the CFTC to serve the subpoena and complaint through the Ooki DAO website’s “Help Chat Box” and also post notice of the subpoena and complaint on “Ooki DAO Online Forum”. (CFTC v. Ooki DAO, No. 22-5416 (ND Cal. Oct. 3, 2022)). Because the CFTC delivered 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 order on alternative service, the court received a request to file an amicus brief expressing concern about the order granting alternative service, which it granted, along with other requests from amici; Then, a scan of the case file shows that the court set a December 7, 2022 date for a hearing on reconsideration of the alternative service order. Generally speaking, the amicus briefs argue that a DAO is not like a traditional business entity where giving notice to the central organization is sufficient for due process and that there is no statutory basis for declaring that a DAO is a “person” under the Exchange Act (as includes “associations” under such definition). The briefs further argue that DAO token holders are not required to participate in the Ooki DAO Online Forum, and that a DAO is by definition decentralized and posting on an online forum and help chat related to the DAO will not necessarily provide “actual notice” to all potential defendants as required by law. Amici argue that if the CFTC wishes to hold individuals accountable for violations of CFTC regulations, it should identify those individuals who violated the regulations and provide due process.

In response, on November 14, 2022, the CFTC filed a consolidated opposition to the amicus briefs on this issue, arguing that the court should not reconsider its order enforcement service, as the CFTC’s method of service complied with applicable law and resulted in actual notice. In this matter, the CFTC argues that the law does not require it to serve all members of an unincorporated association, which is what it considers the Ooki DAO to be, to effect service of process. Overall, the CFTC contends that the Ooki DAO fits the “well-established definition of an unincorporated association,” and strongly disagrees with amici’s characterization of this action:

“The CFTC does not sue 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 through the voting of governance token holders.”

In its opposition papers, the CFTC clarified its intentions and commented on the uproar surrounding the hypothetical possibility of joint liability for Ooki DAO members. It reiterated that it was not suing any individual Ooki DAO members (it only listed the Unincorporated Association Ooki DAO, not any individual Ooki DAO members, as a plaintiff), nor did the complaint ask the court to enter judgment against an individual Ooki DAO member on the basis of that member’s joint and several liability for a judgment against Ooki DAO. As the CFTC explained in its opposition papers, in the hypothetical event the CFTC seeks and obtains a money judgment against Ooki DAO, the CFTC may enforce that judgment only against Ooki DAO’s assets.

With many potential legal issues wrapped up in a motion to reconsider alternative proceedings on the Ooki DAO, we’ll be watching closely to see how the court rules.