Last week, the decentralised autonomous organisation Sushi DAO and its ‘Head Chef’ Jared Grey were served with a subpoena by the SEC. In response, Grey proposed the creation of a “Sushi DAO Legal Defense Fund” to cover the legal costs for the DAO’s core contributors, which would include $3 million in Tether (USDT) initially, with an additional $1 million USDT available if needed. The proposal also stated that the Sushi DAO is cooperating with the SEC and will not comment on any ongoing investigations.
DAOs offer many potential benefits such as transparency and security, however they also present significant regulatory challenges due to their decentralised and autonomous nature. One of the biggest regulatory difficulties with DAOs is the lack of legal recognition and clarity, as DAOs do not neatly fit into any of the traditional legal entity types and will likely be considered partnerships or unincorporated associations. DAOs also usually operate across borders and jurisdictions, making it difficult to determine which laws and regulations should apply. The decentralised nature of DAOs can also make it challenging to identify who is responsible for compliance with any regulatory requirements which might apply.
The Sushi subpoena isn’t the first time a US regulator has gone after a DAO. In September 2022, the CFTC filed a lawsuit against Ooki DAO, the organisation behind the Ooki Protocol. The action raised several key legal concerns for DeFi founders and DAO governance members. In December 2022, a Californian court ruled that the CFTC would need to serve specific individuals in the Ooki DAO, being the founders (as opposed to the DAO as a whole).
Sushi’s proposed legal defense fund would cover legal expenses for any core contributors who joined the project since April 2022 and will continue to pay out until the end of any legal proceedings. The funds will come from a combination of fees on various products and swap transactions conducted on the SushiSwap DEX. The fund is based on the MakerDAO’s legal defense fund which was proposed to DAO members in December 2022 as a protection mechanism. The subpoena represents just the latest in a string of SEC enforcement actions that including fining cryptocurrency exchange Kraken for its staking product, and the issue of a Wells Notice to Coinbase.
Despite the recent developments, Grey expressed his appreciation for the continued support and unity of the blockchain ecosystem in a recent tweet:
The SEC is yet to officially announce it issued the subpoena to Grey or the Sushi DAO. At the time of writing, the Sushi DAO proposal has ~16,000 views and is pending vote.