The Commodities And Futures Trading Commission (CFTC) recently filed an enforcement action against Ok DAO, a decentralized autonomous organization that runs the Ooki Protocol on Ethereum. DAOs are a common form of governance in Web3. Enabled by on-chain smart contracts as well as off-chain apps, they comprise a global community of token holders who propose and vote on various governance decisions.
To date, DAOs have no explicit legal definition or rights, and are often required to register as LLCs to protect their members, but are not recognized or treated as decentralized organizations that lack identifiable leadership. Many decentralized finance (DeFi) protocols are owned and governed by DAOs, including the Ooki protocol (formerly the bZeroX protocol or bZx). Ooki Protocol is an Ethereum on-chain margin trading exchange that offers up to 5x leverage for long and short positions on several popular DeFi cryptocurrencies.
According to the CFTC’s press release, a $250,000 enforcement case has been filed against Ooki DAO for illegally operating an unregistered leverage and margin trading exchange and failing to comply with bank secrecy regulations. According to regulations, US exchanges must collect Know Your Customer (KYC) information, which is impossible for DeFi protocols to comply with in the absence of an on-chain identity system (which NFT IDs may fulfill in the future). The CFTC’s enforcement action specifically targets two founders and the Ooki DAO as a whole, stating in its press release, “The CFTC seeks injunctive relief, disgorgement, civil monetary penalties, trading and registration bans, and injunctive relief against further violations of the CEA [Commodity Exchange Act] and CFTC regulations, as charged.“
Participating in DAO governance just became risky
The enforcement action treats the DAO as a “unincorporated association” and holds its participants liable for legal penalties, which will discourage participation in other DAO-owned projects and will stifle innovation for Web3 decentralized applications (dApps). The crypto community is outraged by the severity of the action, which says Ooki DAO members may face “trading and registration ban“which many interpret to mean being banned from trading cryptocurrency.
It is a long-held belief that transitioning to governance to a DAO provides a DeFi protocol”enforcement certificate,” as the bZeroX founders explicitly said before rebranding the Ooki protocol. However, the CFTC’s enforcement action puts an end to this false belief, as it is an official reason for the enforcement action being brought against the Ooki DAO. The DeFi industry has many DAO-governed protocols for cryptocurrency trading, including margin trading, derivatives and even flash lending services, none of which are designed to collect KYC information, nor can they change their protocols to do so.The fear in the crypto community is if members of the Ooki DAO become held responsible for participating in DAO governance, DAOs will become unsafe to participate in altogether, thus affecting their decentralization.
The CFTC’s enforcement action is considered the most severe ever taken against a blockchain project for the way it holds DAO members accountable for operating an unregistered margin trading exchange. The nature of the action leaves decentralized exchange protocols (DEX) and other DAO-governed DeFi protocols questioning whether they will be next, and whether participation in a DAO exposes them to the risk of legal action. With members of Ok DAO facing potentially life-changing consequences, other DAOs are now fearful that they, too, may be hit by enforcement actions.
Source: CFTC
