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Paradigm Rushes to Defend Ooki DAO in Landmark CFTC Lawsuit

The VC firm lobbied a federal judge to join arguments in a case it believes could “seriously threaten the viability of DAOs.”

5 min read
The DeFi industry has come under more regulatory scrutiny. Image: Shutterstock

Web3 venture capital firm Paradigm has waded into the increasingly choppy waters of the Commodities and Futures Trading Commission’s (CFTC) unprecedented attempt to sue a DAO in federal court

Late Monday, the firm’s attorneys filed a brief in the CFTC’s ongoing lawsuit against Ooki DAO, a decentralized autonomous organization affiliated with decentralized finance company bZeroX. The CFTC recently fined bZeroX for “illegally offering leveraged and margined retail commodity transactions in digital assets,” and for failing to collect mandatory information about the customers using its services. 

After obtaining a settlement with bZeroX, though, the CFTC then pushed further, suing Ooki DAO, an anonymous collective that governed some aspects of bZeroX’s operations, in an effort to seize assets from the organization and potentially ban it from future activities.

Paradigm, in its filing this week, decried the move by the CFTC as illegal, misinformed, dangerous, and intentionally designed to go uncontested in court. 

Though Paradigm is unaffiliated with either bZeroX or Ooki DAO, the company filed an amicus curiae, or “friend of the court” brief in the case this week, meaning Paradigm believes it has particular insight or expertise on topics relevant to the suit that the case’s judge should take into consideration. 

Last week, the case’s judge, William Orrick of the US District Court’s Northern District of California, did in fact accept amicus briefs from two external entities, LeXpunK, a collective of crypto lawyers and developers, and the DeFi Education Fund, a decentralized finance-focused lobbying group. 

In this week’s filing, Paradigm argued that the CFTC’s suit could permanently derail the future adoption of DAOs in America, just as the organization structure has exploded in popularity across the sectors of entertainment, decentralized finance, and culture

“The Commodity Futures Trading Commission is pursuing a theory of liability that would ensnare countless unwary technology users and seriously threaten the viability of DAOs in the United States—pushing the development of this promising technology and its attendant benefits overseas,” Paradigm’s attorneys wrote in the company’s brief.

Central to Paradigm’s argument is its issue with the CFTC’s attempt to implicate every individual who has ever voted on an Ooki DAO proposal in its lawsuit. 

“The Commission seems to…suggest that casting a single vote on the Ooki DAO ties that voter to all of the Ooki DAO’s other current and future participants for all time and all purposes,” the brief read. 

The brief went on to argue that by that logic, an individual who voted against an action would still be held liable for that action if it were later deemed illegal.

“Holding a technological tool liable for the actions of some of its users makes no more sense than holding ‘the internet’ liable for misconduct it facilitates,” the brief argued. 

Of further concern, per Paradigm, is the manner in which the CFTC has attempted—or potentially, deliberately failed to attempt—to convert its suit against an anonymous collective into a case against real defendants able to argue their side in court. 

The CFTC claims it does not know the identities of any Ooki DAO members, and thus only served any potential defendants in the case by posting in an online forum. Judge Orrick ruled last week that this was a proper means of service, despite the fact that not a single Ooki DAO member responded to the forum post.

Paradigm argued that this strategy may have been an intentional ploy on the part of the CFTC to avoid facing any opposing arguments in the landmark case.

“By admitting that it has not located any individual token holders in the Ooki DAO while threatening to hold token holders jointly and severally liable, the Commission has created a strong disincentive for anyone to appear and defend this action,” the brief stated. “And indeed, no defendant has yet appeared.”

To Paradigm, this signals that the CFTC’s suit is “seemingly designed to go uncontested.”

Paradigm did not claim at any point in its brief, though, that if illegal activity were to ever occur via a DAO, that such activity would be unprosecutable. It argues only that the CFTC’s current approach—pursuing Ooki DAO in its entirety without any consideration of the agency or motives of its constituent members—is reckless and unsound.

“When actions occur through pre-set computer code—with occasional input from shifting sets of anonymous voters—assigning responsibility for any particular action may pose practical difficulties,” the brief concluded. “But those difficulties do not warrant dispensing with settled legal concepts in favor of a shotgun approach to liability.”

A hearing is set for November 30, during which the court will hear arguments from both sides—and potentially Paradigm, if Orrick accepts the company’s amicus brief concerning whether the manner in which the CFTC served Ooki DAO members was sufficient. 

The suit comes at a time when American regulators’ zeal in targeting crypto companies and organizations appears to be approaching a fever pitch. The Securities and Exchange Commission (SEC) recently stated it considers all global Ethereum transactions to fall under its jurisdiction; just last week, news leaked that the SEC is currently investigating dominant NFT collection Bored Ape Yacht Club for securities violations. 

Some experts opined the news could have been leaked by the SEC itself, in an effort to stave off competing federal agencies like the CFTC in an escalating turf war for dominion over regulating the crypto space.

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