DAOs are not people, Crypto lawyers tell court in CFTC’s Ooki case

The LeXpunK Army, a group granted permission to file an amicus – or friend of the court – brief in the ongoing Commodity Futures Trading Commission (CFTC) lawsuit against Ooki DAO, argued that the federal regulatory agency should be required to identify and directly serve all individuals it believes have violated federal law, rather than the DAO as an entity.

The CFTC alleged that Ooki DAO was an unincorporated association last month, suing it while simultaneously settling charges against bZeroX, the DAO’s predecessor centralized company, and founders Tom Bean and Kyle Kistner. Last week, CFTC Chairman Rostin Behnam described Ooki DAO’s conduct — that is, offering the same illegal products that bZeroX previously offered without registering or operating a know-your-customer program — as so “egregious” that the agency had not no choice but to press charges. .

Still, it’s how the CFTC has brought these charges that has lawyers in the crypto industry ringing alarm bells. The agency sought the court’s permission to serve the entire DAO at once by posting the lawsuit on a public forum and through a helper bot. Judge William Orrick, of the Northern District of California, briefly approved that move, before responding to two motions for leave to file amicus briefs brought by LeXpunK and the DeFi Education Fund (meaning they requested leave to join the case ). DEF filed its amicus brief alongside the motion to join, which the judge subsequently accepted. LeXpunK had until the end of Monday to file its own amicus brief. Another party, crypto venture fund Paradigm, asked the court to file its own amicus brief earlier on Monday.

In it, the group argues that whether a DAO is an unincorporated association should be interpreted under the Commodity Exchange Act’s federal statutes, rather than under any state concerns.

“Although the CEA includes an ‘association’ in the definition of ‘person,’ … nothing in the statutory text suggests that a DAO is an association,” Brown Rudnick attorneys Stephen Palley and Samuel Moniz, and attorney Alex Golubitsky wrote in the brief.

The filing also expresses concern that operating a DAO, which the paper argues should be seen as software, means it may be impossible for anyone to challenge the precedent.

“No person will be able to challenge whether the CFTC’s actions to expand the definition of “person” are consistent with the requirements of the APA [Administrative Procedures Act] if a default judgment is entered in this case on behalf of the CFTC, the filing states.

Allowing the default action would allow the CFTC to “effectively” craft a rule that circumvents the APA, the lawyers argue.

“In short, there is no independent statutory basis to support the CFTC’s contention that the Ooki DAO is a person or an association. Absent that authority, service on the Ooki DAO cannot be authorized by this court, either under FCRP 4 or otherwise,” the lawyers wrote.

The CFTC has an existing precedent that it can point to when it comes to filing lawsuits against people it believes violated the law, the filing said.

“However, if the CFTC alleges that individuals it cannot identify are responsible for CEA violations, the remedy is to name them as fictitious defendants until such individuals can be identified, served on this action in a manner consistent with FRCP 4, and given an appropriate opportunity to defend themselves. This is the proper method to file and serve a complaint against unknown individuals,” the lawyers said.

The CFTC now has until November 7 to respond to DEF and LeXpunK. The amici parties will then have one more week to respond to any questions raised by the CFTC before all parties meet in court on November 30 to hash out the issues.