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In a court ruling that could have broad implications for the popular Decentralized Autonomous Organization (DAO) structure, a federal district judge ruled in favor of the Commodity Futures Trading Commission (CFTC) and its civil enforcement action against the Ooki DAO last year. In what the CFTC declares "a sweeping victory," the court found that the DAO is a "person" under the Commodity Exchange Act.
"The founders created the Ooki DAO with an evasive purpose, and with the explicit goal of operating an illegal trading platform without legal accountability,” said CFTC Division of Enforcement Director Ian McGinley in a prepared statement.
When the CFTC filed its action against Ooki DAO in 2022, another judge ruled that it could not go after the nebulous organization—serving notice via chatrooms and online forums—but had to name actual people: Tom Bean and Kyle Kistner, founders of the bZeroX protocol that was Ooki DAO’s predecessor.
The agency did so, and Bean and Kistner settled the case with a $250,000 fine.
Along with the settlement, however, the CFTC decisively went after the Ooki DAO, to which the founders bequeathed their operations once they were targeted by regulators.
"By transferring control to a DAO, bZeroX’s founders touted to bZeroX community members the operations would be enforcement-proof," the CFTC noted in a statement. However, they asserted, "U.S. financial regulations "apply equally to entities with more traditional business structures as well as to DAOs.”
The possibility of a DAO being subject to lawsuits and law enforcement was troubling enough for venture capital firm Paradigm to ask to intervene in the case, saying the case would "seriously threaten the viability of DAOs."
Friday's ruling, by U.S. District Judge William H. Orrick, means DAOs are not immune.
Despite the submission of many amicus briefs from other parties commenting on the case, Ooki DAO did not respond to multiple subpoenas. As a result, Orrick issued a default judgement against Ooki DAO for operating an illegal trading platform and unlawfully acting as a futures commission merchant (FCM).
Ooki DAO must now pay a civil monetary penalty of $643,542 and shut down entirely, banning trades and cutting web hosting and domain name registration services to "remove its content from the internet."
"This decision should serve as a wake-up call to anyone who believes they can circumvent the law by adopting a DAO structure, intending to insulate themselves from law enforcement and ultimately putting the public at risk,” McGinley said.
"Not a good outcome for DAOs," commented CEHV partner Adam Cochran on Twitter. "There are certainly challenges with this decision and how it will stand as precedent."