The CFTC’s suit against Ooki DAO sets a bad precedent

by | Sep 29, 2022

Good afternoon, friends!

As you’ve probably noticed, circling the news this week has been the Commodities Futures Trading Commission (CFTC) filed and settled charges against the blockchain protocol bZeroX and its founders in an action that will be felt probably for years to come.

When you look at the news, it’s obvious what happened: the company and its founders created a protocol that allowed for tokenized margin trading and lending services, the CFTC alleged, and they did so without properly registering as an exchange and failing to follow banking secrecy laws. So, they settled the matter for a fairly small $250,000 fine.
It’s quite clear that the company and its founders were on shaky ground when they decided to get into trading without going through the proper channels.
A larger problem is that the CFTC also filed suit against Ooki DAO, the successor bZeroX, and the complaint implicates that all of the governance token holders of the DAO could be culpable for the activities of the DAO. This makes it a potential issue in that it will set a wider precedent in the crypto industry in that it carves a path for other regulatory bodies to peer deeper into decentralized organizations.

The CFTC says that it believes that the founders of bZeroX transferred the control of its protocol to Ooki in order to avoid further enforcement actions, essentially enabling it to be “enforcement proof,” or so it claims. Thus, why it filed its next action against the DAO.

However, in doing so it also attempted to implicate the token holders of the DAO as well, trying to make them responsible for the actions of self-executing software.

In this case, Ooki DAO itself is not a corporation, unlike bZeroX, which is. By choosing to implicate the voting members of the DAO, the CFTC is pulling in people who may have been involved in things as innocuous as changing the name of the DAO or choosing things such as logo colors.

This sentiment has been spoken to by one of the dissenting commissioners of the CFTC, Summer Mersinger, who herself cited the enforcement action as “arbitrary” and “unfair.” She also claimed that the commission itself was sitting on shaky ground as for its own legal capability of enforcing it.

“The Commission’s approach will have a chilling effect that discourages voting, thereby hindering good governance and the development of a culture of compliance in this setting,” Mersinger said. “The unmistakable take-away from the Commission’s definitional approach in these enforcement actions is that those in a DAO community should not vote, even if the governance vote encourages following the law.”

Through this approach, the commission would be putting extra pressure on DAOs and disincentivizing members from voting or participating in them, particularly those who would be seeking to change them to comply with laws.

This is especially problematic given that regulations are still a mishmash between state and federal that do not often match up and trying to tread between them is still a guessing game for many participants in crypto.

Fortunately, most DAOs are not involved in what bZeroX and Ooki DAO are doing and it’s unlikely that this single decision will have much in the way of repercussions. However, it is a sign of the direction that things are headed so people should be paying attention.

This is only the latest move by regulators regarding the enforcement of decentralized protocols. The recent sanctions by the US Treasury Dept. against the crypto mixer protocol Tornado Cash, which also shook the DAO supporting it, and the arrest of its developer Alexey Pertsev have sent even further ripples through the crypto community.

by | Sep 29, 2022 | media | 0 comments

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