No Exemption for DAO from Commodity Exchange Act and CFTC Regulations for Operating a Decentralized Exchange Rules California-Based Federal Court

A decentralized autonomous organization is an unincorporated association under California and federal law that is liable for violations of the Commodity Exchange Act (CEA) and regulations of the Commodity Futures Trading Commission (CFTC), ruled a California-based federal district court on June 8, 2023, in entering a default order for the CFTC in its enforcement action against Ooki DAO.

In this matter, the the United States District Court for the Northern District of California specifically held that Ooki DAO violated the CEA and CFTC regulations because the Ooki Protocol, a decentralized exchange (DEX) that it controlled, (1) engaged in prohibited retail commodity transactions involving digital assets; (2) acted as a futures commission merchant (FCM) without required registration; and (3) failed to comply with anti-money laundering requirements required of all FCMs. 

In ruling for the CFTC, the Court additionally found that “[t]here are also no facts suggesting that the transactions [on the Ooki Protocol] involved securities…” The CFTC’s initial complaint against Ooki DAO alleged that the Ooki Protocol facilitated leveraged and margined transactions in ETH and DAI, among other digital assets.

In imposing its ruling, the Court held that it had personal jurisdiction over Ooki DAO. The Court granted the CFTC’s request for entry of a permanent injunction against Ooki DAO, a monetary penalty of $643,542 and an order that Ooki DAO shut down its website through which persons could access the Ooki Protocol.

The CFTC initially commenced its enforcement action against Ooki DAO in September 2022 (click here for details). Simultaneously, it filed and settled an enforcement action against bZeroX, LLC and its two founders -- Tom Bean and Kyle Kistner (click here for details). bZeroX LLC transferred control of what was subsequently renamed the Ooki Protocol to Ooki DAO in August 2021. 

Previously, the Court in this matter had authorized alternative service of process by posting the CFTC’s summons and complaint on the Ooki Dao online discussion forum and help chat box (click here for details), as well as by personally serving Mr. Bean and Mr. Kistner (click here for details).

Although Ooki DAO entered no formal appearance in this matter, four amici filed a brief with the Court in opposition to the CFTC’s default motion (click here for details). 

According to the CFTC's recently appointed new Director of Enforcement Ian McGinley: “[t]his 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.”

In 2018, the Securities and Exchange Commission (SEC) commenced and settled an enforcement action against Zachary Coburn, the founder of the EtherDelta DEX, for causing EtherDelta to operate as an unregistered national securities exchange (click here for details).

Bottom Line:

The CFTC is technology neutral in requiring all persons to comply with the CEA and CFTC regulations. Although advocates of decentralized finance have argued that DeFi applications should be outside the scope of traditional regulatory authority as they are solely computer code, this view has generally been rejected by regulators, applying the principle of “same risks, same rules.” Although Ooki DAO was not a traditionally litigated matter, it will be a precedent cited by the CFTC and potentially the SEC in bringing other enforcement actions against other unregistered DeFi applications.