You can’t give notice to a crypto collective, say crypto groups in the Ooki lawsuit

(Reuters) – A battle over the U.S. Commodity Futures Trading Commission’s plan to serve its lawsuit against a decentralized crypto collective via a chat box and online discussion forum is shaping up as an early test of the regulator’s controversial theory of collective responsibility.

Last month, as you may recall, the CFTC filed its first-ever lawsuit against a Decentralized Autonomous Organization, or DAO. The regulator alleged in a federal court complaint in San Francisco that Ooki DAO, which controls a blockchain protocol that allows users to take long or short positions on cryptocurrency valuations, violated the Commodity Exchange Act by operating as an unregistered derivatives exchange.

The CFTC argued that the Ooki DAO is effectively an unincorporated association – and that anyone who owns an Ooki governance token and has exercised the right as a token holder to vote on Ooki governance matters is responsible for the DAO’s conduct.

This theory provoked heated disagreement even within the CFTC’s leadership, with Commissioner Summer Mersinger accusing her colleagues of using inapplicable precedent and circumventing formal rulemaking to engage in inappropriate regulatory enforcement.

Three crypto groups have now filed briefs echoing Mersinger’s allegations – but in the unlikely context of challenges to the CFTC’s new plan to serve legal documents, including notice of the lawsuit, on the Ooki DAO.

The CFTC told U.S. District Judge William Orrick of San Francisco last month that the DAO’s structure, by design, presents “significant obstacles to traditional litigation.” The collective has no physical headquarters or mailing address, the CFTC said. It has no corporate officers and no agent designated to accept service. It is not even registered in any jurisdiction.

But the CFTC argued that the judge should not allow the DAO to take advantage of its deliberate maneuvers to evade regulators. It asked Orrick to allow alternative service, and suggested that DAO members be notified of the CFTC lawsuit through the website ooki.com, which has a discussion forum and chat box purporting to offer help to people interested in the Ooki DAO.

Because these are “the only mechanisms Ooki DAO has chosen for the public to contact it directly,” the CFTC told the judge, the agency had already posted notice of the lawsuit, as well as related documents, on its website. And based on responses on social media, the agency said, it appeared that those posts did indeed provide notice to Ooki DAO token holders.

Orrick granted the CFTC’s motion on October 3, holding that the agency had performed service on the Ooki DAO by posting messages and documents via the chat box and discussion forum.

Notably, Ooki DAO has not appeared in the CFTC’s case. But three amici have filed briefs objecting to the CFTC’s alternative services: DeFi Education Fund, an advocacy group promoting decentralized financial products; LeXpunK, a group of crypto lawyers and software developers offering open source legal resources for DAOs; and Paradigm Operations LP, an investment firm that backs crypto companies.

Broadly speaking, the groups’ brief argues not only that the CFTC’s notification plan violates constitutional due process protections and the Federal Rules of Procedure, but also that the agency’s failure to serve process on the DAO reveals the fundamental flaw in the CFTC’s case. The Ooki DAO, its amici argued, is simply not an association with a defined membership acting together to achieve a common purpose.

“The commission skips over an important issue,” insisted the DeFi Education Fund’s attorneys from Sullivan & Cromwell. “Before deciding how to serve a DAO, the Commission must first ask whether the DAO is even the kind of entity that can serve as a plausible defendant in its case.”

The CFTC wants to portray Ooki token holders as a “collective business enterprise,” LexPunK counsel to Brown Rudnick added. But that’s not how the DAO works, it argued. Token holders do not need to use the ooki.com website — or, for that matter, any central platform — to vote or discuss Ooki issues, the amicus briefs argued. And if token holders decide to vote on particular Ooki proposals, LexPunK’s mission said, they usually do so “solely to advance their own personal, individual, unaffiliated interests.”

All three amici argued that the CFTC’s goal is to obtain a default judgment against the entire DAO, rather than identifying individual token holders who engaged in allegedly illegal conduct and serving those individuals through traditional processes. That way, LeXpunK argued, the CFTC can fend off challenges from individual defendants who argue that the commission’s attempt to regulate DAOs through an enforcement action is itself a violation of the Administrative Procedure Act.

If the CFTC believes that some holders of Ooki DAO tokens are liable for violations of the Commodity Exchange Act, LexPunK said, the commission should have filed suit against the Doe defendants and sought discovery to determine the identity of the alleged wrongdoers. Instead, LeXpunK argued, “The CFTC has invented a theory that a DAO is a person, and invented a rule that it can be served through a chat box on a website.”

The CFTC’s unprecedented attempt to serve token holders through its website is symbolic, Paradigm’s Jones Day counsel argued, of the agency’s refusal to recognize that a DAO is not a regular business, but a “broad, distinct set of people.” And none of those people, Paradigm said, had fair warning that the CFTC would seek to hold them accountable for each other’s actions.

“These are serious allegations, and the court should consider them with great care — beginning with a requirement of constitutionally due process before the commission’s enforcement action can proceed,” Paradigm’s brief said.

The CFTC did not respond to a question about the amicus briefs.

Orrick said he would treat the amicus filings as motions to reconsider his order authorizing alternative services for the DAO. (He has not yet authorized the Paradigm letter to be filed.) The judge asked the CFTC to respond to the amicus briefs by Nov. 7 and scheduled a hearing on the dispute for Nov. 30.

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