CFTC Pushes Back Against Amicus Briefs in Ooki DAO Lawsuit

Lawyers for the CFTC served notice of the lawsuit against the DAO via a website help bot and a forum post. The four amicus briefs say the CFTC wasn't playing fair.

AccessTimeIconNov 15, 2022 at 3:30 a.m. UTC

Cheyenne Ligon is a CoinDesk news reporter with a focus on crypto regulation and policy. She has no significant crypto holdings.

The U.S. Commodity Futures Trading Commission (CFTC) on Monday hit back against four amicus briefs filed on behalf of Ooki DAO, a decentralized autonomous organization (DAO) which the CFTC sued in September for allegedly violating federal commodities laws by illegally offering leveraged and margin crypto trading products to U.S. investors.

The amicus briefs – filed by crypto legal consortium LeXpunK, the DeFi Education Fund, and venture capital firms Paradigm and Andreessen Horowitz – urged Northern California district court Judge William Orrick to reconsider his earlier order granting the CFTC's motion for alternative service, which approved the CFTC's unorthodox method of serving notice of the lawsuit on the members of the DAO via a help bot on the DAO's website and a post on its forum, rather than to a DAO member directly.

In its motion of opposition filed Monday, the CFTC pushed back, arguing that it served the legal papers the only way the DAO made itself available. And, because the DAO was clearly aware of the lawsuit – it was acknowledged in both a tweet from the DAO's official Twitter account and a discussion between members in a DAO-run forum – the CFTC says the notice was effectively served.

The CFTC's suit against the members of Ooki DAO (a parallel action to suits that have already been settled against the DAO's alleged predecessor entity, bZeroX and its two founders) has been contentious – even within the CFTC.

Commissioner Summer Mersinger issued a rare dissenting opinion following news of the suit, calling the enforcement action "arbitrary and unfair," and claiming that, because all governance token holders were considered voting members of the DAO by the suit, it "affirmatively disincentivizes voting participation in DAO governance generally...The Commission's approach will have a chilling effect that discourages voting, thereby hindering good governance and the development of a culture of compliance in this setting."

In addition to potentially having a chilling effect on DAO participation, the amicus briefs collectively aruged that the CFTC's action could stifle novel software developments – something the CFTC's lawyers took issue with in their opposition.

"The CFTC is not suing technology, as Amici claim: The CFTC’s action is not against the blockchain-based Ooki Protocol, but against the Ooki DAO — an association that acts and makes collective decisions regarding the Ooki Protocol through voting by its governance token holders," the CFTC argued. "The factors Amici claim disqualify the Ooki DAO as an unincorporated association — variable membership over time, inconsistent voting by members, and different or divergent views and opinions among members — are nothing more than features of almost any unincorporated association (or other business entity, for that matter)."

A DAO by any other name

The CFTC's motion also takes opposition with the DAO's decision not to wrap itself in a corporate structure.

"Nothing prevented the Ooki DAO... from choosing to avail itself of some corporate form recognized by law to shield individual members from liability and limit potential creditors to monetary recovery from the Ooki DAO Treasury only," the motion stated.

"Multiple states have set up LLC-like registration frameworks to facilitate DAO registration to attempt to obviate such individual liability issues. Here, Ooki DAO members did not choose to adopt such an approach, assuming — incorrectly —that eschewing a more traditional entity structure, with its concomitant individual-member liability protections, would 'future-proof' it against regulation."

Ooki DAO, the CFTC argues in its motion, cannot avoid liability for breaking the law simply by transforming itself into or labeling itself a DAO – which is what the CFTC alleges was the purpose of creating Ooki DAO in the first place.

"The Ooki DAO was created, at least in part, with evasive purpose — to avoid obligations to comply with the law. The bZeroX, LLC founders believed DAOs could not be held responsible for violating the law," the motion states.

"What [the Amici briefs] are ultimately saying is that DAOs are nothing — or at least nothing that can be sued, or served, or held accountable for running a for-profit trading platform that operates in violation of the CEA and a CFTC Regulation, or for any other legal violations. Accordingly...simply switching business forms from an LLC to a DAO makes an entity immune from suit and outside any government’s enforcement reach. For the reasons stated herein, this ignores the relevant facts and is not the law, and the CFTC respectfully submits that this Court should not endorse that radical and dangerous proposition," it adds.

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Cheyenne Ligon is a CoinDesk news reporter with a focus on crypto regulation and policy. She has no significant crypto holdings.

CoinDesk - Unknown

Cheyenne Ligon is a CoinDesk news reporter with a focus on crypto regulation and policy. She has no significant crypto holdings.