Crypto DAOs and Their Token Holders Aren’t Safe From the CFTC

    Community-run projects popular in crypto known as DAOs, are within the purview of the agency’s oversight…
    By: BLOOMBERG
    | Updated on: Sep 25 2022, 00:05 IST
    Crypto
    The CFTC on Thursday filed and settled charges against bZeroX LLC and its founders Tom Bean and Kyle Kistner for illegally offering.  (MINT_PRINT)
    Crypto
    The CFTC on Thursday filed and settled charges against bZeroX LLC and its founders Tom Bean and Kyle Kistner for illegally offering.  (MINT_PRINT)

    A recent enforcement action by the Commodity Futures Trading Commission signals that the community-run projects popular in crypto known as decentralized autonomous organizations, or DAOs, are within the purview of the agency's oversight -- as are the millions of people who hold DAO governance tokens that are used to make decisions.

    The CFTC on Thursday filed and settled charges against bZeroX LLC and its founders Tom Bean and Kyle Kistner for illegally offering “leveraged and margined retail commodity transactions in digital assets,” among other charges. Simultaneously, the CFTC filed a federal civil enforcement action in the U.S. District Court for the Northern District of California charging the Ooki DAO — a decentralized effort that bZeroX converted into last year -- with violating the same laws, holding it liable as an “unincorporated association.”

    The action may have big implications for the nearly 5,000 DAOs in existence, about 2,300 of which have assets of more than $1 million, according to tracker DeepDAO. Many crypto projects have transformed themselves into DAOs -- organizations governed by holders of special tokens -- over the past year, partly in hopes to avoid regulatory scrutiny. Some of these crypto apps don't check their customers' identities, or otherwise comply with many existing financial-industry laws.

    “I think this is an important action, because it highlights that regulators need not be dissuaded by claims of decentralization,” said Hilary Allen, a law professor at American University. “Ultimately, there are always people who establish and run crypto services, even if they seek to hide from regulators by using a DAO. The CFTC has set a precedent for seeing through the decentralization rhetoric and looking at the economic realities of how DAOs operate.”

    The CFTC's action holds accountable for the DAO's violations those individuals who participated in decision-making for the Ooki protocol by exercising their governance tokens. This is significant, experts and market watchers say.

    “This is a really sweeping claim by the CFTC that everybody who exercises governance tokens is somehow responsible for the DAO,” said Gary DeWaal, chair of Katten Muchin Rosenman's financial markets and regulation practice. “It's quite significant and from the industry's perspective, quite scary.”

    There are 3.9 million holders of governance tokens, according to DeepDAO, and they include many venture-capital firms like Andreessen Horowitz.

    “It is clear that the CFTC believes that anyone who participates in governance of a protocol, even on one occasion, should be held liable for activity on the protocol that violates laws the CFTC enforces,” said Marc Boiron, chief legal officer at Polygon Companies, which builds blockchain infrastructure.

    Spokespeople at the CFTC didn't immediately return a request for comment.

    Boiron believes the CFTC's action doesn't set a precedent, as no independent party, such as a court, has agreed with the agency. But, he added, “it is possible that a court will agree because nobody who holds tokens will defend Ooki DAO.”

    Because the Ooki protocol is distributed around the world and can't be shut down, a court action in favor of the CFTC could result in “holders of tokens who the CFTC believes have done nothing wrong (if they have not participated in governance) losing significant value in their tokens while the protocol continues to exist and be available to be used by US and non-US people in a way the CFTC claims violates the law,” Boiron said.

    The message for investors? Involvement in a DAO may now mean more risks, and potential liability.

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    First Published Date: 25 Sep, 00:05 IST
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