The United States Commodity Futures Trading Commission (CFTC) has secured default judgment against Ooki DAO, a decentralised autonomous organisation (DAO). The order requires that Ooki DAO pay a civil monetary penalty of USD$643,542, cease all operations, and is permanently banned from engaging in regulated behaviour. The decision is being held up as a landmark decision in the US (the CFTC has called it a "sweeping victory") as the Court had to consider amicus curie briefs submitted by leading minds in the crypto industry which argued against the imposition of legal liability on tokenholders as a form of unincorporated association.
The CTFC initiated the lawsuit in September 2022, concurrently with an administrative order against Ooki DAO's predecessor, bZeroX, and its founders. The CFTC's argument was built around whether a DAO and its governance token holders could be held liable for the actions of other individuals within the organisation.
The judgment refers Tom Bean and Kyle Kistner, the founders bZeroX LLC transfering control of the bZeoX software protocol to the bZx DAO, which was later renamed Ooki DAO, deliberately to seek to escape the CFTC's jurisdiction.
The CFTC alleged:
the bZx Founders believed that transition to a DAO would insulate the bZx Protocol form regulatory oversight and accountability for compliance with U.S law
Ooki DAO was accused of unlawfully offering leveraged and margined retail commodity transactions outside of operating as a registered exchange, it was also charged with failing to comply with obligations under the US Bank Security Act. In the suit, Ooki DAO was treated as an unincorporated association, meaning the CFTC viewed the token holders themselves as parties operating the legal equivalent of a business.
The judgment means that DAOs similar to Ooki DAO are more likely to be seen by the US Courts as unincorporated associations with potential personal liability for token holders or those involved in governance decisions. It is unclear if the CFTC will take enforcement action against individual token holders having settled with the original founders of Ooki DAO.
A particular area of controversy was how the CFTC was to serve notice of the lawsuit to a DAO in the first place, given the absence of any physical business entity or physical address. In the end, the CFTC was granted permission by the court to serve the lawsuit via the chatbox on the Ooki DAO website, and to post the lawsuit on Ooki DAOs online forum.
Ooki DAO did not respond to the lawsuit by the deadline of 10 January 2023, giving the CFTC the opportunity to seek entry of default judgment. The decision serves as a warning to DAOs which seek to be entirely decentralised, or those operating products or protocols which, if centralised, would be plainly financial products or services, as regulators in the US continue an approach of regulation by enforcement.