SHARE

FEATURED STORY October 18, 2022

Thinking DAOs Are Enforcement-Proof? Think Twice

You've Reached Your
Free Article Limit This Month
Register for free to get unlimited access to all Law.com OnPractice content.
Register Now

In our previous post "How Do You Sue a DAO? These Recent Developments May Shed Some Light ," our partner, Mioko Tajika, looked into the legal status of a DAO and explored the uncertainties and implications associated with the operation of a DAO from a legal perspective. Now, with a recent action brought against Ooki DAO by the U.S. Commodity and Futures Trading Commission (the "CFTC"), we have the opportunity to see some of the uncertainties raised in our previous posts answered.

CFTC filed on September 22, 2022 to initiate an action against Ooki DAO for its alleged violations of the Commodity Exchange Act, relevant CFTC regulations and the Bank Secrecy Act. The facts underlying the alleged violations include (a) the offering of decentralized commodity leveraged trading features by Ooki DAO's to its users through its bZx Protocol without being properly registered as a futures commission merchant, and (b) its lack of sufficient customer identification program required under the Bank Secrecy Act. While the laws governing the violations have been those that have developed and enforced for decades, what are truly intriguing, in the context of operations of DAOs and DeFi, is how CFTC serve process on Ooki DAO and how the members of Ooki DAO are or will be treated in the action.

CFTC's Service of Process on Ooki DAO

The first aspect that is worth discussing in CFTC's action is that the court upheld CFTC's service of process on the Ooki DAO "by providing a copy of the summons and complaint through the Ooki DAO's Help Chat Box, with contemporaneous notice by posting in the Ooki DAO's Online Forum. " As discussed in our previous post, "whom to serve process upon and whether the recipient is authorized to receive process" has been a material hurdle when suing a DAO given a DAO's murky legal status and the nature of its operation. CFTC proceeded with its service of process by submitting to the court in its filing that:

(i) as observed by the commission, Ooki DAO has no established headquarters, physical office locations, mailing address or listed representatives (or agent) to accept service, nor has it registered as a legal entity in any of the 50 states;

(ii) the Ooki DAO website has a "help chat box" that prompts users to communicate or submit any texts or attachments through the chat box;

(iii) the Ooki DAO website has a link to an online forum, where the holders of Ooki DAO Token (the governance token of the DAO) to discuss and vote on governance issues;

(iv) upon the filing of the complaint, the commission also has delivered relevant filing documents through Ooki DAO's chat box and posted the documents on the DAO's forum, observing from Ooki DAO's Telegram channel (to which the commission had requested and obtained access) that at least 38 messages were discussing the complaint and a member of the Ooki DAO identified as a "Community admin" stated that "[I]'m sure there will be an official statement from the Ooki DAO team soon."

While it is not discernable from the court's order as to what are the decisive factors driving the court to uphold CFTC's service of process, we could still deduce from the surrounding facts, as laid out by CFTC, that Ooki DAO has numerous members acting as the "administrator" of the DAO and that the communications through the unconventional channels (i.e., help chat box and online forum in this incident) could still provide sufficient notice to those that "govern" the DAO. These facts, when determined collectively, could be used as the basis for future actions brought against a DAO, regardless of whether the action is initiated by a regulator or a private party.

Potential Liabilities of Ooki DAO Members

Another aspect that is worth noting is that members of Ooki DAO who hold governance tokens may be held personally liable for the alleged violations of the DAO. One popular view concerning the liability of the members of a DAO is that such members are shielded from claims and liabilities given the nature and operation of a DAO. In our previous post, we had discussed that "[a] popular (untested) view… is that a DAO is akin to an ‘unincorporated general partnership,'" and that because the DAO is not incorporated, there will be no corporate shield for members of a DAO deemed as an unincorporated general partnership, thereby making its members jointly and severally liable with the DAO and other members. CFTC's enforcement action has just reflected the above popular but untested view.

In this enforcement action, CFTC not only goes after Ooki DAO with a federal civil enforcement action in California but the two individual founders (i.e., Tom Bean and Kyle Kistner) of the DAO, with whom CFTC reached a separate settlement for the identified violations. In CFTC's complaint against Ooki DAO for the commission's civil enforcement action, the commission expressly stated that the DAO is an "unincorporated association comprised of holders of Ooki DAO Tokens… who vote those tokens to govern (e.g., to modify, operate, market, and take other actions with respect to) the bZx Protocol…." While CFTC charged Ooki DAO as the principal responsible for the actions of the DAO's "members, officers, employees, and agents," it also expressly stated in the settlement order separately reached with the individual founders of the DAO that "[a]s members of the for-profit Ooki DAO unincorporated association (i.e., as Ooki Token holders who voted… to govern the Ooki DAO… Bean and Kistner are personally liable for the Ooki DAO's debts… they are personally liable for the Ooki DAO's violations…." Although such enforcement approach may still be subject to judicial testing, it nevertheless lays the ground for future actions and has accordingly resulted in the exposure of those who hold and actively vote governance tokens of a DAO to significant risks comprising of joint and several liabilities.

ALM expressly disclaims any express or implied warranty regarding the OnPractice Content, including any implied warranty that the OnPractice Content is accurate, has been corrected or is otherwise free from errors.

More From Ingram Yuzek Gainen Carroll & Bertolotti

Takeaways From SEC v. LBRY, Inc. On What Constitutes A "Security"

By Chih-Hsun (Tim) Lin Ingram Yuzek Gainen Carroll & Bertolotti November 21 , 2022

It has been a long and heated debate as to whether NFTs and certain cryptocurrencies can be deemed as securities under applicable laws and precedents.

The Can't Be Evil License: Creating Order In The "Wild West" NFT Space

By Mioko C. Tajika Ingram Yuzek Gainen Carroll & Bertolotti November 15 , 2022

In a prior post, we wrote about the importance of reviewing the terms governing the sale of an NFT to determine what rights, if any, are included in the sale in order to commercially exploit the asset associated with the NFT, and the confusion that emerges in interpreting such terms through the lens of copyright law.

'And We'll Never Be Royals' If NFT Royalties Are Made Optional

By Kimberly L. Barcella Ingram Yuzek Gainen Carroll & Bertolotti November 08 , 2022

When NFTs first entered the mainstream in early 2021, the ability of artists and creators to receive resale royalties for their works was touted as one of the key features setting NFTs apart from other digital assets.

More From Banking & Finance

Key Priorities for Borrowers in a Bear Market

By David van Dijk Greenberg Traurig November 03 , 2022

Tracking the financial covenants in loan documents is a key priority for borrowers in a bear market.

Beneficial Ownership Reporting Requirements: FinCEN Issues Final Rule for Implementation of Corporate Transparency Act

By Marina Olman-Pal Greenberg Traurig October 26 , 2022

On Sept. 29, 2022, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued a final rule (Final Rule) implementing the beneficial ownership information (BOI) reporting provisions of the Corporate Transparency Act (CTA).

FinCEN, OFAC Announce Largest Virtual Currency Enforcement Action to Date

By Daniel B. Pickard Buchanan Ingersoll & Rooney October 18 , 2022

On October 11, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) and Financial Crimes Enforcement Network (FinCEN) announced settlements of over $24 million and $29 million, respectively, with Bittrex, Inc., a crypto trading platform based in Bellevue, Washington, for violations of the Bank Secrecy Act.

Featured Stories
Closeclose
Search
Menu

Working...