CFTC files first lawsuit against decentralized autonomous organization

The U.S. Commodity Futures Trading Commission (CFTC) alleges that Ooki DAO and bZeroX engaged in activities only registered futures commission merchants (FCM) can perform.

In a Thursday statement, CFTC announced that it filed and simultaneously settled charges against bZeroX, a decentralized trading platform, and its two founders, Tom Bean and Kyle Kistner, for illegally offering leveraged and margined retail commodity transactions in digital assets without proper registration.

“These transactions were unlawful because they were required to take place on a designated contract market, but did not. Additionally, by soliciting and accepting orders for and entering into retail commodity transactions with customers, and accepting money or property (or extending credit in lieu thereof) to margin these transactions, bZeroX illegally operated as an unregistered FCM,” the release reads.

According to CFTC, bZeroX also failed to implement KYC procedures that all registered FCMs are legally obligated to follow. Co-founders Bean and Kistner were ordered to cease and desist from further violations and pay a $250,000 civil monetary penalty.

CFTC also filed a lawsuit against Ooki DAO, charging it with violating the same laws as bZeroX. Ooki was established as a successor to Bean and Kistner, who used to maintain control over the bZx Protocol before transferring governance power to a DAO in August 2021. The regulator alleges that this move was made with the intention to avoid legal enforcement.

“By transferring control to a DAO, bZeroX’s founders touted to bZeroX community members the operations would be enforcement-proof—allowing the Ooki DAO to violate the CEA and CFTC regulations with impunity, as alleged in the federal court action. 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.”

CFTC decision, which is believed to be the first such case brought against DAO, triggered a strong dissent from many crypto advocates and policymakers, including CFTC Commissioner Summer Mersinger, who voiced her disagreement in a Thursday statement. Mersinger pointed out that the Commodity and Exchange Act does not provide the Commission with authority to regulate the Ooki DAO, since blockchain technology and digital assets just started to develop when the CFTC statute was last amended by Congress.

“While I do not condone individuals or entities blatantly violating the CEA or our rules, we cannot arbitrarily decide who is accountable for those violations based on an unsupported legal theory amounting to regulation by enforcement while federal and state policy is developing. For these reasons, I am respectfully dissenting in this matter,” she wrote.

The same opinion was shared by Jake Chervinsky, lawyer and head of policy at the U.S. Blockchain Association, who called the CFTC decision “the most egregious example of regulation by enforcement in the history of crypto.”

“It's deeply disappointing to see the CFTC damage its own reputation like this among those who care about the future of crypto in the United States, especially at a critical moment while it pitches itself in Congress as the right agency to regulate “digital commodity trades”,” he added.

Yet, CFTC Chair Rostin Behnam remained adamant that current regulations apply equally to traditional financial institutions as well as to DAOs.

“Today’s actions demonstrate the CFTC’s commitment to aggressively pursuing individuals and their operations who purposefully seek to evade regulatory oversight at the expense of retail customers,” he said in a statement. “I commend our dedicated enforcement team for pursuing this scheme which touches on many areas of concern regarding this growing market.”