Ooki DAO to shut down after ‘precedent setting’ court battle with CFTC

June 10, 2023 Coin Telegraph

bZeroX

The CFTC highlighted that “critically, in a precedent-setting decision” the Ooki DAO was held in court as “‘person’ under the Commodity Exchange Act.”

A U.S. District Judge has entered a default judgment order that requires Decentralized Organization Ooki DAO to permanently shut down and pay a civil monetary penalty of $643,542.

Today the CFTC’s Division of Enforcement Director Ian McGinley released a statement on the Ooki DAO litigation victory. Learn more: https://t.co/MInNeKLeH5
— CFTC (@CFTC) June 9, 2023

The Commodity Futures Trading Commission initially filed a lawsuit against Ooki DAO in September 2022, accusing the DAO of illegally offering retail margin and leverage trading services, and “unlawfully acting” as a futures commission merchant.

A default judgment had essentially been on the cards for months after Ooki DAO missed the deadline to respond to the lawsuit in January.

With the order now official as of June 9, the CFTC released a statement on the same day describing the lawsuit as a “sweeping victory” as it outlined the full scope of the default judgment.

Ooki DAO has received “permanent trading and registration bans” and moving forward it has been ordered to shut down the Ooki DAO website and “remove its content from the Internet.”

“Critically, in a precedent-setting decision, the court held that the Ooki DAO is a ‘person’ under the Commodity Exchange Act and thus can be held liable for violations of the law. The court then held that the Ooki DAO did, in fact, violate the law as charged.”

This case against Ooki DAO was unique as it marked one of the first times a government agency had gone after a DAO and its token holders.

Before this case, there was a belief held amongst the industry that DAOs and decentralized finance platforms were mostly protected from regulatory scrutiny due to their decentralized nature.

A key issue however, is that CFTC alleged that Tom Bean and Kyle Kistner, the founders of Ooki DAO’s predecessor bZeroX had intentionally attempted to hand over ownership of their non-compliant trading platform to the Ooki DAO to avoid any potential legal pushback.

“The founders created the Ooki DAO with an evasive purpose, and with the explicit goal of operating an illegal trading platform without legal accountability,” noted CFTC division of enforcement director Ian McGinley, adding that:

“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.”

Here in Ooki, the court found that DAO could be sued as California unincorporated association by CFTC in a federal case because state law applies to these formalities, and under Cali. law, "mutual consent" to form an association can be established by just holding a DAO token (!) pic.twitter.com/OR9fOPh2dT
— ross (@z0r0zzz) June 9, 2023

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CTFC slammed for ‘blatant regulation by enforcement’ over Ooki DAO case

September 23, 2022 Coin Telegraph

bZeroX

The CFTC’s actions have even been met with strong pushback from its own commissioner, while others have drawn comparisons to the SEC’s regulation by enforcement tactics.

The Commodities Futures Trading Commission (CFTC) has sparked strong criticism from the community after filing a federal civil enforcement action against members of decentralized autonomous organization Ooki DAO over digital asset trading violations.

In a Sept. 22 release, the CFTC stated that it had filed and simultaneously settled charges against the founders of decentralized trading platform bZeroX Tom Bean and Kyle Kistner for their role in “illegally offering leveraged and margined retail commodity transactions in digital assets”

However, the community has kicked up a fuss over a simultaneous civil enforcement action against bZeroX’s associated Ooki DAO and its members, which it alleges it operated the same software protocol as bZeroX after it was passed control of it, and thus “violating the same laws as the respondents.”

The enforcement action has drawn the ire of a number of crypto lawyers and even a CFTC commissioner with concerns it will set an unfair regulatory precedent.

In a dissenting statement on Sept. 22, CFTC commissioner Summer Mersinger noted that while she supports the CFTC’s charges against the bZeroX founders, the enforcement body is stepping into uncharted legal territory when taking action against DAO members that voted on governance proposals.

“I cannot agree with the Commission’s approach of determining liability for DAO token holders based on their participation in governance voting for a number of reasons.”

“This approach constitutes blatant ‘regulation by enforcement' by setting policy based on new definitions and standards never before articulated by the Commission or its staff, nor put out for public comment,” she said.

Jake Chervinsky, lawyer and head of policy at the U.S. Blockchain Association on Twitter said the enforcement action "may be the most egregious example" of regulation by enforcement in the history of crypto, and drew comparisons between the U.S. Securities and Exchange Commission and the CTFC, noting that:

“We've complained at length about the SEC abusing this tactic, but the CFTC has put them to shame.”

It's deeply disappointing to see the CFTC damage its own reputation like this among those who care about the future of crypto in the United States, especially at a critical moment while it pitches itself in Congress as the right agency to regulate "digital commodity trades."
— Jake Chervinsky (@jchervinsky) September 22, 2022

The DeFi Education Fund also chimed in by noting that the CFTC’s charges also offer a gloomy prospect for people trying to innovate via DAOs.

“'Lawmaking via enforcement’ stifles innovation in the US, and today’s action will sadly further discourage any US person from not only developing but also *merely participating* in DAOs,” it wrote.

Big picture themes to take away: 1. How much control does a Dao have? if it's too much, maybe it's the counterparty to the transactions offered by the protocol; maybe decentralization of control over the protocol, not over voting to control of the protocol is what matters. /11
— Drew Hinkes (@propelforward) September 22, 2022

The list of charges include illegally offering retail leverage and margin trading; “engaging in activities only registered futures commission merchants (FCM) can perform;” and failing to incorporate a customer identification program under the Bank Secrecy Act.

The CTFC also outlined that Bean and Kistner indicated that they wanted to transfer bZeroX over the Ooki DAO as part of a move to avoid crackdowns under the gray area of decentralization.

“By transferring control to a DAO, bZeroX’s founders touted to bZeroX community members the operations would be enforcement-proof — allowing the Ooki DAO to violate the CEA and CFTC regulations with impunity,” the CFTC stated.

bZeroX