The U.S. Commodity Futures Trading Commission has taken a precedential action against a decentralized autonomous organization (DAO). It has simultaneously filed and settled charges against bZeroX, a decentralized blockchain protocol, and its founders for illegal digital asset trading and failure to verify customers.
The CFTC alleged that bZeroX enabled users to trade leveraged and margined digital assets without proper permission. It also accused the platform of failing to adopt a program to identify customers in violation of the Bank Secrecy Act.
As a penalty, the CFTC levied a $250,000 fine against bZeroX and its founders, Tom Bean and Kyle Kistner, alongside a cease and desist order from further violations of regulations.
- As the CFTC sees it, bZeroX must have registered as a futures commission merchant before facilitating the trade of leveraged and margined detail assets. It also should have implemented a know-your-customer program to avoid facilitating illegal financial activities.
- The U.S. Bank Secrecy Act requires financial institutions to file reports of daily transactions exceeding $10,000 and report any transaction that raises alarms for money laundering, tax evasion, or other criminal activities. bZeroX lacking a customer identification program violated this act, the CFTC asserted.
At the same time, the CFTC filed another suit against the Ooki DAO, a decentralized autonomous organization that now controls the bZx Protocol. It’s charging the Ooki DAO for the same violations it levied a fine against bZeroX for. It's seeking penalties including a fine, trading ban, and court injunction.
- In simpler terms, the CFTC has charged the successor organization to bZeroX with the same violations it pressed against the preceding organization.
The action against Ooki is noteworthy for setting a precedent of regulators going after a decentralized autonomous organization. By the CFTC's purview, Ooki operated as an unincorporated entity despite its governance model as a supposed decentralized organization.
The CFTC is effectively invalidating the Ooki DAO by considering it an unregistered entity. It implies that the individual members of the DAO are responsible for the violations, which is a concerning precedent in the industry. In future cases, DAO members could be on the hook for alleged violations made by their organization.
Before bZeroX’s founders, Tom Bean and Kyle Kistner, transferred control of their protocol to the Ooki DAO, they were personally responsible for its governance and any supposed violations, demonstrated by the fine levied against them individually.
The CFTC is arguing that the transfer to Ooki doesn’t change the situation much. Instead, every member of the Ooki DAO (including Bean and Kistner) should be on the hook for the fresh accusations. “The order finds the DAO was an unincorporated association of which Bean and Kistner were actively participating members and liable for the Ooki DAO’s violations of the CEA and CFTC regulations,” it said in a Thursday press release outlining the charges.
However, Ooki can count one dissenter from the CFTC on their side. Summer Mersinger, a commissioner at the agency, penned a statement opposing some parts of the action against the decentralized autonomous organization.
In Mersinger’s view, individual members of the DAO (token holders) shouldn't be personally liable for the alleged violations. “First, not only does this approach fail to rely on any legal authority in the CEA (Commodity Exchange Act), it also does not rely on any case law relevant to this type of action,” she said.
“Additionally, this approach arbitrarily defines the Ooki DAO unincorporated association in a manner that unfairly picks winners and losers, and undermines the public interest by disincentivizing good governance in this new crypto environment,” Mersinger said.
The precedent the CFTC is trying to set isn’t indisputable. It’ll be up to the courts to decide, where both sides of the suit will get the opportunity to defend themselves. If the courts rule in the CFTC’s favor, we could see more similar action against DAOs in the future.
Get smarter about crypto
Join 250,000+ subscribers and get our 5 min daily newsletter on what matters in crypto.