What Happened? A $650k fine for an unincorporated DAO
On Friday, June 9, 2023, U.S. District Judge William H. Orrick ruled in favor of the U.S. Commodity Futures Trading Commission (CFTC) in CFTC v. Ooki DAO. The DAO is ordered to cease operations and pay a penalty of 643,542 USD. In its press release, the CFTC labeled the court decision as "precedent-setting." This is based on Ooki DAO's recognition as a "person" under the Commodity Exchange Act (CEA), which allowed the court to hold the DAO liable for law violations. The precedent could open the door for follow-up actions against other DAOs and decentralized exchanges that do not have a formal legal personality.
The founders created the Ooki DAO with an evasive purpose and with the explicit goal of operating an illegal trading platform without legal accountability,” Ian McGinley, Director of the Division of Enforcement at the CFTC, said in a press release. “This decision should serve as a wake-up call to anyone who believes they can circumvent the law by adopting a DAO structure, intending to insulate themselves from law enforcement and ultimately putting the public at risk.”
The transition of control and repeat offenses: from bZeroX to the Ooki DAO
From June 1, 2019, to August 23, 2021, bZeroX developed and implemented a blockchain protocol for margin retail trading. The bZx protocol allowed customers to make margin (collateral) to open credit positions, the ultimate value of which was determined by the difference in the price of two digital assets. The CFTC argued that such transactions were illegal because they had to be conducted on a specialized contract market. By conducting retail commodity transactions with customers and accepting money or property for margin, bZeroX illegally acted as an unregistered commission-based futures trader. The company also failed to comply with mandatory customer identification procedures, violating the Bank Secrecy Act.
On August 23, 2021, bZeroX transferred control of the protocol to the bZx DAO, now known as the Ooki DAO. The founders believed that this would secure them from possible legal actions. However, the Ooki DAO continued to use the protocol similarly, leading to repeated violations. The DAO began as an organization with two operators, Bean and Kistner. But over time, it transformed into a DAO with many members (tokenholders). The CFTC, by charging Bean and Kistner, made it clear that the Ooki DAO could not infringe with impunity.
The Ooki DAO tried to argue that having unincorporated association status, they could not be sued. The CFTC, however, proved otherwise based on the following arguments:
The CFTC has shown that Ooki DAO is a "group of two or more persons" because it consists of individual tokenholders who are generally recognized as individuals
The CFTC demonstrated that two or more individuals joined the Ooki DAO "by mutual consent"
The CFTC was able to prove that the Ooki DAO had a "common legitimate purpose." The court explained that:
Ooki DAO consists of token holders
These tokens can be used to vote on certain management decisions, which may include suspending trading, making changes to program protocol, distributing funds from the central treasury, or choosing to rebrand the DAO
The general purpose of token holders is to manage the DAO, in particular through the use and distribution of funds from its treasury
The CFTC testified that Ooki DAOs "operate under a common name in circumstances where fairness requires that the group be recognized as a legal entity."
The outcome of the court proceedings. What are the legal consequences of the court's decision for Ooki DAO?
As a result of the court order, the DAOs closed their U.S. operations and ceased business relationships with any persons registered with the CFTC. The order includes, among other things, directions to cease providing web services and an obligation to preserve documents. This obligation applies not only to Ooki DAO itself but also to any persons providing web hosting or domain name registration services in the United States for sites owned by Ooki DAO. Such persons/entities must cease operating the site, preserve documents, and inform the CFTC of other sites controlled by or operating on behalf of Ooki DAO.
The decision has sparked a wave of discussion in the blockchain community, becoming the first of its kind. The precedent strengthens the CFTC's control over DAOs, making them more vulnerable to prosecution. The liability of DAOs to the law is becoming increasingly clear.