DAOs Aren't People, Crypto Lawyers Tell Court in CFTC's Ooki Case

The CFTC should serve the people it believes are responsible for Ooki DAO's alleged violations rather than the DAO itself, LeXpunK Army argued Monday.

AccessTimeIconOct 18, 2022 at 2:12 a.m. UTC
Updated Oct 18, 2022 at 2:49 p.m. UTC

Nikhilesh De is CoinDesk's managing editor for global policy and regulation. He owns marginal amounts of bitcoin and ether.

Decentralized autonomous organizations (DAO), collectives that typically govern activities by voting through the use of crypto tokens, are not people and should not be treated as such, a group of lawyers and developers told a California court Monday.

LeXpunK Army, a group that received permission to file an amicus – or friend of the court – brief in the ongoing Commodity Futures Trading Commission (CFTC) lawsuit against Ooki DAO, argued that the federal regulatory agency should be required to identify and directly serve any people it believes has violated federal law rather than the DAO as an entity.

The CFTC alleged that Ooki DAO was an unincorporated association last month, suing it while simultaneously settling charges against bZeroX, the DAO's predecessor centralized company and founders Tom Bean and Kyle Kistner. Last week, Commodity Futures Trading Commission Chair Rostin Behnam described Ooki DAO's behavior – that is, offering the same illicit products bZeroX previously offered without registering or operating a know-your-customer program – as so "egregious" that the agency had no choice but to bring charges.

Still, it's how the CFTC has brought these charges that has attorneys in the crypto industry sounding alarm bells. The agency sought court permission to serve the entire DAO at once by posting the lawsuit on a public forum and through a help bot. Judge William Orrick, of the Northern District of California, briefly approved this move, before responding to two motions for leave to file amicus briefs brought by LeXpunK and the DeFi Education Fund (meaning they asked for permission to join the case). DEF filed its amicus brief alongside its motion to join, which the judge accepted after the fact. LeXpunK had until the end of Monday to file its own amicus brief. Another party, crypto venture fund Paradigm, asked the court to file its own amicus brief earlier on Monday.

In it, the group argues that whether a DAO is an unincorporated association should be interpreted under the Commodity Exchange Act's federal statutes, rather than under any state concerns.

"While the CEA includes an 'association' within in the definition of 'person', ... nothing in the statutory text suggests that a DAO is an association," wrote Brown Rudnick attorneys Stephen Palley and Samuel Moniz, and attorney Alex Golubitsky in the brief.

The filing also expresses concern that serving a DAO, which the brief argues should be seen as software, means it may be impossible for anyone to challenge the precedent.

"No person will be able to challenge whether the CFTC’s actions in expanding the definition of 'person' comport with the requirements of the APA [Administrative Procedures Act] if a default judgment is entered in this matter on the CFTC’s behalf," the filing said.

Allowing the default action would allow the CFTC to "effectively" create a rule bypassing the APA, the attorneys argue.

"In short, there is no independent statutory basis to support the CFTC’s assertion that Ooki DAO is a person or an association. Without this authority, service on Ooki DAO cannot be approved by this Court, whether under FCRP 4 or otherwise," the attorneys wrote.

The CFTC does have existing precedent it can point to in bringing a lawsuit against individuals it believes violated the law, the filing said.

"But if the CFTC alleges that individuals it cannot identify are responsible for CEA violations, the solution is to name them as fictitious defendants until such persons can be identified, served with this lawsuit in a manner consistent with FRCP 4, and given an appropriate opportunity to defend themselves. This is the correct method of filing and serving a complaint against unknown individuals," the attorneys said.

The CFTC now has until Nov. 7 to respond to the DEF and LeXpunK briefs. The amici parties will then have another week to respond to any issues raised by the CFTC before all parties meet in court on Nov. 30 to hash the questions out.

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Nikhilesh De is CoinDesk's managing editor for global policy and regulation. He owns marginal amounts of bitcoin and ether.

CoinDesk - Unknown

Nikhilesh De is CoinDesk's managing editor for global policy and regulation. He owns marginal amounts of bitcoin and ether.