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

Magazine: Tornado Cash 2.0 — The race to build safe and legal coin mixers

Ooki DAO misses lawsuit response deadline, default judgment on the cards

January 12, 2023 Coin Telegraph

California

The commodities regulator has begun the process of getting a court ruling on the Ooki DAO case after the latter failed to respond to the lawsuit by the deadline.

The Commodity Futures Trading Commission (CFTC) has begun the process of getting a default judgment in its case against Ooki DAO after the latter missed the deadline to respond to the lawsuit.

According to a Jan. 11 court filing, the regulator has requested the court for an "entry of default" against the decentralized autonomous organization (DAO), stating it had missed the deadline to "answer or otherwise defend" as instructed by the summons.

If approved, the entry of default will establish Ooki DAO has failed to plead or defend itself in court and will no longer be able to answer or respond to the suit.

An "entry of default" is the first step in the process of gaining a default judgment — a ruling handed down by the court when the defendant fails to defend a lawsuit.

The lawsuit in question was filed by the CFTC on Sept. 22, accusing Ooki DAO of illegally offering “leveraged and margined” digital asset commodity transactions to retail traders along with failing to enact a way to identify customers and “engaging in activities only registered futures commission merchants (FCM) can perform.”

The lawsuit was served to the DAO through its help chat box along with a notice on its online forum.

In December, District Judge William Orrick ordered the regulator to serve Tom Bean and Kyle Kistner, the founders of a predecessor trading platform to Ooki DAO, adding the CFTC “should serve at least one identifiable Token Holder if that is possible.”

Bringing forward the lawsuit without clear regulatory guidelines had many criticize the regulator. CFTC commissioner Summer Mersinger even called the action a “regulation by enforcement” approach.

The case could set an interesting precedent for future lawsuits involving DAOs as charges and enforcement will be carried out against an organizational structure with no central body that often includes anonymous members.

In a Dec. 20 court filing, Judge Orrick said Ooki DAO "has the capacity to be sued as an unincorporated association under state law" but said that does not "necessarily establish" the DAO is an association which can be held liable under commodities regulations.

He added those questions can be addressed "later in litigation."

Judge orders CFTC to serve Ooki DAO founders with lawsuit

December 13, 2022 Coin Telegraph

CFTC

The DAO was initially served with a lawsuit via a help chat box but a federal judge said the regulator “should serve at least one identifiable Token Holder.”

A United States federal judge has ordered the Commodities Future Trading Commission (CFTC) to serve its lawsuit to the two original founders of the Ooki decentralized autonomous organization (DAO).

On Dec. 12, District Judge William Orrick ordered the U.S. regulator to serve Tom Bean and Kyle Kistner, the founders of the decentralized trading platform bZeroX which was the predecessor to Ooki DAO.

Bean and Kistner had already settled charges with the CFTC in September relating to illegal commodities offerings on bZeroX, while separate charges were laid against Ooki DAO token holders, which was served using a help chat box as well as a notice on its online forum.

However, when Judge Orrick later discovered Bean and Kistner were alsOoki DAO token holders he reconsidered how the CFTC was to serve the lawsuit.

“It seems clear in this case that Ooki DAO has actual notice of the litigation,” Judge Orrick wrote. “But to provide the best practicable notice, the CFTC should serve at least one identifiable Token Holder if that is possible.”

The CFTC’s original approach to filing the lawsuit received pushback and crypto industry participants filed amicus briefings in support of Ooki DAO which argued the CFTC should find Ooki DAO members and serve them directly with the lawsuit.

The U.S. District Court for the Northern District of California held a hearing on Dec. 7 with the CFTC and those entities who filed amicus briefs to persuade Judge Orrick to reconsider allowing the CFTC to serve Ooki DAO through its help chat box.

“At the hearing, the CFTC asserted it knew that some of Ooki DAO’s Token Holders reside and conduct business in the United States because the two founders of Ooki DAO’s predecessor entity, bZeroX LLC, are Token Holders who reside in the United States,” Orrick wrote.

“This was new information to me,” he added. “Neither the complaint nor the CFTC’s Motion for Alternative Service mention that the former founders, [Bean and Kistner], are or have been Token Holders.”

“The CFTC is now ORDERED to serve Bean and Kistner, in their roles as Ooki DAO Token Holders,” he concluded.

On Sep. 22, the CFTC settled charges against Bean and Kistner for “illegally offering leveraged and margined retail commodity transactions in digital assets” through bZeroX.

Simultaneously, it filed its lawsuit against Ooki DAO alleging it operated the same software as bZeroX after it was given into its control which violated “the same laws as the respondents.”

The CFTC was strongly criticized, even by its own people, for bringing the lawsuit without clear regulatory guidelines with CFTC commissioner, Summer Mersinger, calling it a “regulation by enforcement” approach.

The CFTC’s Ooki Dao action is a bad omen for American crypto developers

October 16, 2022 Coin Telegraph

CFTC

Decentralized autonomous organizations (DAOs) were supposed to be regulation-proof. Federal regulators now have targeted not just a DAO, but also its investors.

Considerable anxiety exists in the world of Web3 related to regulation and the legal status of cryptocurrency projects. It’s particularly apparent in the United States, where the Commodity Futures Trading Commission (CFTC) fueled concerns in September with an announcement that it was imposing a $250,000 fine on a decentralized autonomous organization (DAO), Ooki DAO, and its investors. The fine was particularly ominous, considering DAOs are intended to be “regulation proof.”

The CFTC said in its statement on the issue that Ooki DAO’s bZeroX protocol offered illegal off-exchange trading of digital assets. The agency took issue with the fact that the founders, Tom Bean and Kyle Kistner, tried to use the existing bZeroX protocol within the DAO to put it beyond the reach of regulators.

“By transferring control to a DAO, bZeroX’s founders touted to bZeroX community members the operations would be enforcement-proof,” the CFTC said. “The bZx Founders were wrong, however. DAOs are not immune from enforcement and may not violate the law with impunity.”

The fine is not all that surprising. The CFTC and other regulators are not going to abide by a veil of decentralization. But, there is something within the ruling that is extremely worrying to Web3 lawyers and developers. The agency’s complaint indicated that the voters within a given DAO could be distinctly liable.

In other words, no longer will only founders be targeted, as users who take part could also be liable. This is sure to have a chilling effect on turning people away from DAOs and Web3 in general. After all, the whole point is to avoid this kind of targeting and to create new ecosystems where all parties can vote in peace on issues that concern them.

And, it’s not a standalone case. The Securities and Exchange Commission is vying with the CFTC for authority over the world of Web3. Crypto libertarians would dispute whether centralized authorities should have a say at all in an ecosystem that they have only attacked and never aided.

The Stabenow-Boozman bill, a proposal in the U.S. Senate, would potentially give the CFTC direct oversight of tokens that qualify as digital commodities. This means that exchanges and online Web3 providers would potentially register with the CFTC, further enmeshing decentralized finance (DeFi) within a centralized web that it was engineered to escape.

Monitoring wallets, targeting smart contracts and more

The SEC has traditionally sought to regulate cryptocurrency as much as possible. The agency plays a useful role as it is able to pursue instances of outright fraud and Ponzi schemes, which are rampant in Web3. But, there is a stark difference between going after instances of fraud and regulating or governing the industry with regulations that are inapplicable.

There are too many question marks related to crypto regulation. One example is related to microtransactions and airdrops. Such transactions take place on many different exchanges over many years, with various price fluctuations. This is impossible to report on from a tax perspective, especially when many platforms are no longer operating. Along with rewards for staking and even derivative tokens liquid staking, it becomes almost impossible to account for.

The Biden administration is even targeting Proof-of-Work (POW) blockchains with new "comprehensive guidelines" issued in September. That’s at the same time many administration officials seem to be pushing for a digital USD.

Another extremely controversial, draconian crypto regulation that lawmakers have floated includes forcing receivers to verify the personal information of senders when transactions exceed $10,000. They are also seeking to regulate smart contracts as future contracts. And criminal charges are being introduced for those who develop mixers or privacy coins.

Though nobody has really said it, what we seem to be witnessing is a war on crypto cloaked in democratic language. The very pillars upon which distributed ledgers have been built are crumbling if these measures are enforced.

More conflict to follow?

The conflict between traditional regulators and modern finance seems to be reaching a melting point. Regulations are not adapting to meet the needs and strengths of modern DeFi. As such, there is now a standoff between new Web3 protocols and existing legislation. It is almost impossible to deal with the existing legal system as it is not flexible enough to account for DeFi.

Ooki DAO is indeed a bad omen for U.S. crypto developers. And it certainly won’t be the last one. A sleuth of bills and procedures are in place. Paradoxically, such actions are likely to simply encourage developers to create programs that are even more resistant to existing laws. The impossibility of complying with existing legislation can leave them with little other choices.

In one sense, it leaves U.S. crypto developers in the dark regarding what they should develop. From another angle, perhaps the path forward is quite clear. All protocols moving forward may have to be fully decentralized.

This was the premise of the very first cryptocurrency, Bitcoin (BTC). Without a central point of failure, there is nobody to target. Developers will have to work on building ecosystems that are completely separate with no ties to the legacy financial system.

Blockchains free of identity and Know-Your-Customer (KYC) requirements are the only possible option if developers want to continue operating on American shores. That’s something they are going to have to recognize sooner rather than later.

Masha Prusso is the founder of Story VC, an entity that invests in blockchain startups. She co-founded Crypto PR Lab in 2018 and worked as the head of PR and head of events at Polygon between 2021-22. She is also a qualified attorney in France, with degrees from Sorbonne and Berkeley Law School. She represented Russia in the Winter Olympic Games 2006 as the youngest athlete in snowboarding halfpipe at the age of 16.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

CFTC can issue summons through Ooki DAO’s help chat box, says judge

October 4, 2022 Coin Telegraph

CFTC

A federal judge said the court’s decision was based on the CFTC effectively serving the Ooki DAO by providing the necessary documents in its Sept. 22 lawsuit.

The United States Commodities Futures Trading Commission can serve members of the Ooki decentralized autonomous organization, or DAO, with summons through online communications, according to a federal judge.

In an Oct. 3 order granting a CFTC motion, U.S. District Judge William Orrick said the commission could provide a copy of its summons and complaint through Ooki DAO’s help chat box as well as a notice on its online forum. The judge said the court’s decision was based on the CFTC effectively serving the Ooki DAO by providing the necessary documents.

The CFTC filed a lawsuit against the Ooki DAO on Sept. 22, alleging the organization offered “illegal, off-exchange digital asset trading,” violated registration guidelines and broke provisions of the Bank Secrecy Act. The legal action came alongside similar charges against bZeroX and its founders, ordered to pay $250,000 as part of a civil monetary penalty.

Ooki DAO members discussed how to respond to the CFTC lawsuit, suggesting it allocate funds from the treasury to hire lawyers for DAO members, attempt to elicit support from the DeFi community and raise legal funds by selling nonfungible tokens. Many expect the organization will initiate a governance vote to finalize any decision on dealing with the lawsuit.

Many in the crypto space have criticized the CFTC for pursuing enforcement actions against organizations and companies without clear regulatory guidelines. Jake Chervinsky, head of policy at crypto advocacy group Blockchain Association, said the legal actions against Ooki DAO and bZeroX are “the most egregious example of regulation by enforcement in the history of crypto.”

Ooki DAO members explore options in response to CFTC lawsuit

September 29, 2022 Coin Telegraph

Coin Telegraph

Members of the Ooki DAO are discussing various ways to respond to the recent lawsuit filed by the CFTC.

Members of the decentralized autonomous organization (DAO) called Ooki DAO have started looking into an appropriate response to the charges filed by the United States Commodities Futures Trading Commission (CFTC).

On Sept. 22, the CFTC announced a $250,000 penalty and settlement with bZeroX, the creators of the decentralized lending platform bZx protocol which suffered from code exploits in 2020 that led to hundreds of thousands in losses. In addition to this, the CFTC also filed a lawsuit against Ooki DAO over similar alleged violations of digital asset trading laws.

In response, Ooki DAO members started to discuss how they should respond to the lawsuit. The DAO identified three potential responses including allocating funds from its treasury toward hiring lawyers for the DAO members. The second option brought up by the DAO members is to try and elicit support from the decentralized finance (DeFi) community to support the legal battle.

Another option brought by members of the DAO is raising funds by selling nonfungible tokens (NFTs). The community discussed this possibility as well and highlighted that it's another viable option to raise funds for litigation.

Because of the options laid out in the discussion, it’s very likely that the DAO will initiate a governance vote to finalize a decision.

On Sept. 23, the CFTC received backlash from its own commissioner for its actions against the Ooki DAO. According to CFTC commissioner Summer Mersinger, while she agrees with the charges against the founders of bZeroX, she could not agree with the Commission's approach to determining liability for the DAO's token holders.

Meanwhile, CFTC's Caroline Pham has recently proposed the creation of an office that's dedicated to protecting retail consumers. Dubbed "Office of the Retail Advocate," the office will become the people's voice according to Pham. In a speech, the commissioner said that there is a need to balance innovation with retail protection and this will be the focus of the said office.

US Commodities Regulator CFTC Slaps Crypto Firm With $250,000 Fine, Issues Cease-and-Desist Order

September 23, 2022 The Daily Hodl

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.

Ooki DAO

Monitoring wallets, targeting smart contracts and more

More conflict to follow?

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