{"id":7365,"date":"2022-09-24T09:14:45","date_gmt":"2022-09-24T09:14:45","guid":{"rendered":"http:\/\/cryptoheretostay.com\/?p=7365"},"modified":"2022-09-24T09:14:46","modified_gmt":"2022-09-24T09:14:46","slug":"cftc-is-suing-a-dao-heres-why-defi-users-should-be-alarmed","status":"publish","type":"post","link":"https:\/\/cryptoheretostay.com\/?p=7365","title":{"rendered":"CFTC Is Suing a DAO. Here\u2019s Why DeFi Users Should Be Alarmed"},"content":{"rendered":"<p> <script type=\"text\/javascript\">\r\namzn_assoc_placement = \"adunit0\";\r\namzn_assoc_tracking_id = \"totafreearti-20\";\r\namzn_assoc_ad_mode = \"search\";\r\namzn_assoc_ad_type = \"smart\";\r\namzn_assoc_marketplace = \"amazon\";\r\namzn_assoc_region = \"US\";\r\namzn_assoc_default_search_phrase = \"crypto\";\r\namzn_assoc_default_category = \"All\";\r\namzn_assoc_search_bar = \"false\";\r\namzn_assoc_title = \"\";\r\namzn_assoc_rows =\"1\";\r\n<\/script>\r\n<script src=\"\/\/z-na.amazon-adsystem.com\/widgets\/onejs?MarketPlace=US\"><\/script><br \/>\n<\/p>\n<h3>Key Takeaways<\/h3>\n<p>The CFTC has filed a lawsuit against the decentralized autonomous organization behind the Ooki Protocol, Ooki DAO, for allegedly running an illegal derivatives trading platform.<br \/>\nThe lawsuit marks the first time a government agency has charged governance token holders of a decentralized non-custodial blockchain protocol for allegedly breaking the law.<br \/>\nThe case could set a terrible legal precedent for DAOs and DeFi governance token holders.<\/p>\n<p>Share this article<\/p>\n<p>In the lawsuit, the Commodity Futures Trading Commission claimed that \u201cDAOs are not immune from enforcement and may not violate the law with impunity.\u201d<\/p>\n<h2>CFTC Sues Ooki DAO in Landmark Case<\/h2>\n<p>The Commodity Futures Trading Commission has launched a controversial attack on a DAO, and it could have serious consequences for DeFi.<\/p>\n<p>In a Thursday press release, the U.S. government agency announced that it had simultaneously filed and settled charges against the former operators of the bZx Protocol (later renamed to Ooki Protocol), bZeroX, LLC, and its founders, Tom Bean and Kyle Kistner. The CFTC also filed a federal civil enforcement action against Ooki DAO.\u00a0<\/p>\n<p>In the settlement, the CFTC argued that by designing, deploying, and marketing the bZx Protocol\u2014a decentralized smart contract-based protocol for margin trading\u2014without registering with the agency, the defendants illegally operated a designated contract market (DCM), engaged in activities only registered futures commission merchants (FCM) can perform and failed to conduct mandatory know-your-customer (KYC) diligence on the platform\u2019s users.<\/p>\n<p>The CFTC also filed a federal civil enforcement action against Ooki DAO\u2014a decentralized autonomous organization that subsequently assumed governance control over the Ooki Protocol\u2014under the same charges. This case is significant because it marks the first time a regulatory agency has sued a DAO and because the legal implications of the CFTC winning the case could set a terrible legal precedent for governance token holders of other crypto projects, including many DeFi protocols.\u00a0<\/p>\n<p>In the lawsuit, the CFTC defined Ooki DAO as an \u201cunincorporated association\u201d comprised of BZRX token holders \u201cwho vote those tokens to govern (e.g., to modify, operate, market, and take other actions with respect to) the bZx Protocol.\u201d The agency claims that the bZx founders, Bean and Kistner, transferred control over the protocol to the community in an attempt to skirt regulations. It said:<\/p>\n<p>\u201cA key bZeroX objective in transferring control of the bZx Protocol (now the Ooki Protocol) to the bZx DAO (now Ooki DAO) was to attempt to render the bZx DAO, by its decentralized nature, enforcement-proof. Put simply, the bZx Founders believed they had identified a way to violate the Act and Regulations, as well as other laws, without consequence.\u201d<\/p>\n<p>\u201cThe bZx Founders were wrong, however,\u201d the CFTC concluded, claiming that \u201cDAOs are not immune from enforcement and may not violate the law with impunity.\u201d<\/p>\n<h2><strong>The Implications for DeFi Token Holders<\/strong><\/h2>\n<p>By labeling the DAO as an unincorporated association, the CFTC has effectively stated that its members have unlimited liability and are fully responsible for any of its actions. This argument is especially concerning given that the regulator didn\u2019t care that the Ooki Protocol is a decentralized, non-custodial protocol powered by smart contracts. As such, it can\u2019t comply with the existing regulations designed for centralized financial entities, nor can it be shut down by DAO members or any other party.<\/p>\n<p>The CFTC winning the case in court would establish a legal precedent that could make it much easier for the agency to target other decentralized derivatives trading protocols like Synthetix, GMX, dYdX, Injective, Gains Network, and Perpetual Protocol. If that ever happens, then SNX, GMX, DYDX, INJ, GNS, and PERP token holders that have voted on any governance proposals could become liable and subject to prosecution for the protocol\u2019s potentially illegal operations.<\/p>\n<p>Several prominent figures in the crypto community have slammed the CFTC over the lawsuit. According to the general council and head of decentralization at the renowned venture capital firm Andreessen Horowitz, Miles Jennings, the critical issue with the CFTC\u2019s case is that the agency \u201cis trying to apply the [Commodities Exchange Act] to a protocol and DAO at all.\u201d Passed in 1936, almost half a decade before the Internet was invented, the CEA was designed to regulate commodities and derivatives trading on centralized marketplaces and therefore can\u2019t\u2014in its current form\u2014be suitable for regulating software-based non-custodial trading platforms.<\/p>\n<p lang=\"en\" dir=\"ltr\">The CFTC&#8217;s bZx enforcement action may be the most egregious example of regulation by enforcement in the history of crypto. We&#8217;ve complained at length about the SEC abusing this tactic, but the CFTC has put them to shame. Read Comm&#8217;r Mersinger&#8217;s dissent: https:\/\/t.co\/0T3l3y79H7<\/p>\n<p>\u2014 Jake Chervinsky (@jchervinsky) September 22, 2022<\/p>\n<p>Jake Chervinsky, lawyer and head of policy at the Blockchain Association, said that the move \u201cmay be the most egregious example of regulation by enforcement in the history of crypto.\u201d He added that \u201cwe\u2019ve complained at length about the SEC abusing this tactic, but the CFTC has put them to shame.\u201d\u00a0<\/p>\n<p>The CFTC\u2019s move comes after crypto\u2019s legal community has shown overwhelming support for the agency\u2019s renewed push to become the primary regulator of cryptocurrencies. In August, U.S. Senators Debbie Stabenow (D-MI), John Boozman (R-AR), Cory Booker (D-NJ), and John Thune (R-SD) introduced the Digital Commodities Consumer Protection Act that seeks to close regulatory gaps between state and federal regulation of cryptocurrencies. If passed, the DCCPA would make the CFTC the leading oversight agency for cryptocurrencies that aren\u2019t otherwise deemed securities.\u00a0<\/p>\n<p>In light of its many negative experiences with the Securities and Exchange Commission, the crypto industry largely embraced the DCCPA as a bill that could get the securities regulator off its back and introduce some much-needed regulatory clarity. With its most recent enforcement action, however, the CFTC seems to have erased any goodwill it had previously earned from the industry\u2019s stakeholders and prompted public dissent from one of its own commissioners, Summer K. Mersinger.<\/p>\n<h2><strong>CFTC\u2019s Prospects of Winning<\/strong><\/h2>\n<p>Notably, commissioner Mersinger published\u00a0a dissenting statement opposing the CFTC\u2019s strategy in the Ooki DAO case. Specifically, he took issue with the agency\u2019s approach to determining liability for DAO token holders based on their participation in governance voting. \u201cThis approach arbitrarily defines the Ooki DAO unincorporated association in a manner that unfairly picks winners and losers, and undermines the public interest by disincentivizing good governance in this new crypto environment,\u201d he said.<\/p>\n<p>Furthermore, Mersinger argued that the approach didn\u2019t rely on any legal authority granted in the CEA or relevant case law, represented undesirable \u201cregulation by enforcement,\u201d and ignored well-established precedent for determining liability in similar violations.\u00a0<\/p>\n<p>Commenting on the issue on Twitter, the former associate deputy attorney general at the Department of Justice and current director of global regulatory matters at ConsenSys, William Hughes, said that \u201ca court has to agree with the CFTC for these theories about DAO liability for a token to be meaningful.\u201d He added that it\u2019s \u201cnot going to be easy\u201d for the CFTC to convince any court, suggesting that the lawsuit may not be as alarming as it first appears.\u00a0<\/p>\n<p>It\u2019s apparent that the CFTC\u2019s arguments stand on rather shaky ground, and the agency will likely struggle to win the case in a landslide\u2014assuming adequate defense from Ooki DAO. If the CFTC loses the case, that should set a very promising legal precedent for DAOs and governance token holders.<\/p>\n<p><i>Disclosure: At the time of writing, the author of this feature owned ETH and several other cryptocurrencies.<\/i><\/p>\n<p>Share this article<\/p>\n<p>The information on or accessed through this website is obtained from independent sources we believe to be accurate and reliable, but Decentral Media, Inc. makes no representation or warranty as to the timeliness, completeness, or accuracy of any information on or accessed through this website. Decentral Media, Inc. is not an investment advisor. We do not give personalized investment advice or other financial advice. The information on this website is subject to change without notice. Some or all of the information on this website may become outdated, or it may be or become incomplete or inaccurate. We may, but are not obligated to, update any outdated, incomplete, or inaccurate information.<\/p>\n<p>You should never make an investment decision on an ICO, IEO, or other investment based on the information on this website, and you should never interpret or otherwise rely on any of the information on this website as investment advice. We strongly recommend that you consult a licensed investment advisor or other qualified financial professional if you are seeking investment advice on an ICO, IEO, or other investment. We do not accept compensation in any form for analyzing or reporting on any ICO, IEO, cryptocurrency, currency, tokenized sales, securities, or commodities.<\/p>\n<p>See full terms and conditions.<\/p>\n<p><script type=\"text\/javascript\">\r\namzn_assoc_placement = \"adunit0\";\r\namzn_assoc_tracking_id = \"totafreearti-20\";\r\namzn_assoc_ad_mode = \"search\";\r\namzn_assoc_ad_type = \"smart\";\r\namzn_assoc_marketplace = \"amazon\";\r\namzn_assoc_region = \"US\";\r\namzn_assoc_default_search_phrase = \"bitcoin\";\r\namzn_assoc_default_category = \"All\";\r\namzn_assoc_search_bar = \"false\";\r\namzn_assoc_title = \"\";\r\namzn_assoc_rows =\"1\";\r\n<\/script>\r\n<script src=\"\/\/z-na.amazon-adsystem.com\/widgets\/onejs?MarketPlace=US\"><\/script><br \/>\n<br \/><a href=\"https:\/\/cryptobriefing.com\/cftc-suing-dao-heres-why-defi-users-be-alarmed\/?utm_source=category_feed&#038;utm_medium=rss\" target=\"_blank\" rel=\"noopener\">Source<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Key Takeaways The CFTC has filed a lawsuit against the decentralized autonomous organization behind the Ooki Protocol, Ooki DAO, for allegedly running an illegal derivatives trading platform. The lawsuit marks the first time a government agency has charged governance token holders of a decentralized non-custodial blockchain protocol for allegedly breaking the law. The case could [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":7366,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":"","_wp_rev_ctl_limit":""},"categories":[4],"tags":[],"class_list":["post-7365","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-market-news"],"_links":{"self":[{"href":"https:\/\/cryptoheretostay.com\/index.php?rest_route=\/wp\/v2\/posts\/7365","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/cryptoheretostay.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/cryptoheretostay.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/cryptoheretostay.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/cryptoheretostay.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=7365"}],"version-history":[{"count":1,"href":"https:\/\/cryptoheretostay.com\/index.php?rest_route=\/wp\/v2\/posts\/7365\/revisions"}],"predecessor-version":[{"id":7367,"href":"https:\/\/cryptoheretostay.com\/index.php?rest_route=\/wp\/v2\/posts\/7365\/revisions\/7367"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/cryptoheretostay.com\/index.php?rest_route=\/wp\/v2\/media\/7366"}],"wp:attachment":[{"href":"https:\/\/cryptoheretostay.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=7365"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/cryptoheretostay.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=7365"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/cryptoheretostay.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=7365"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}