Last year, a federal district judge sided with the Commodity Futures Trading Commission (CFTC) in its civil enforcement case against the Ooki DAO (Decentralized Autonomous Organization.) This decision might have far-reaching repercussions for the DAO structure. The CFTC calls the court’s ruling that the DAO is a “person” under the Commodity Exchange Act a “sweeping victory.”
Decentralized autonomous organizations (DAOs) are organizations that make their own decisions and run on blockchain networks with the use of smart contracts. They are built to operate autonomously without a single point of control. These pioneering organizations have grown in notoriety in recent years due to their potential to disrupt areas like banking, government, and capital markets.
Legal consequences: Imposed penalties for shutting down
CFTC Director of Enforcement Ian McGinley’s prepared statement states, “The founders created the Ooki DAO with an evasive purpose and with the explicit goal of operating an illegal trading platform without legal accountability.”
Another judge concluded that the Commodity Futures Trading Commission (CFTC) could not sue Ooki DAO in 2022 without naming specific individuals, such as Tom Bean and Kyle Kistner, the creators of the bZeroX protocol that Ooki DAO was based on.
The government acted accordingly, and Bean and Kistner paid a $250,000 fine to resolve the issue.
However, the CFTC also took a firm stance against the Ooki DAO, to whom the founders had handed over operations after they came under regulatory scrutiny.
The CFTC said that the bZeroX founders promised the bZeroX community that their operations would be untouchable because they had transferred control to a DAO. But they insisted that “U.S. financial regulations “apply equally to firms with more traditional company structures and DAOs.”
Paradigm, a venture capital firm, has asked to intervene in a case because it is concerned that the likelihood of legal action and law enforcement against a DAO could “seriously threaten the viability of DAOs.”
U.S. District Judge William H. Orrick’s opinion on DAOs on Friday shows they are not beyond the reach of the law. McGinley argued that the ruling should warn others who think they can avoid legal consequences by adopting a DAO structure, as doing so would put the public in danger.
It’s “not a good outcome for DAOs,” tweeted CEHV partner Adam Cochran. “It’s unclear how this ruling will set a precedent, and that presents some difficulties.”
Ooki Dao’s legal recognition and its consequences
The ramifications of the court recognizing DAOs as legal entities for blockchain and decentralized governance are profound. This sets a precedent for the eventual oversight and accountability of DAOs by regulators, which may increase the crypto community’s sense of safety and legitimacy.
Legally recognizing DAOs could provide investors and participants in decentralized initiatives with more legal protections and avenues for redress in the event of fraud or other illegal conduct. As a result of this judgment, DAO members and developers may be more wary of engaging in fraudulent or destructive acts, which could improve governance within DAOs.
The cost of a shutdown
The court found the Ooki DAO to be a valid entity and imposed a hefty shutdown penalty of $643,542. This punishment is intended as both a deterrence and a measure of restitution to those harmed by the DAO’s fraudulent actions. The high fine imposed by the court shows that fraudulent activity within DAOs will not be allowed.
This significant shutdown penalty and the court’s recognition of a DAO as a legal body marks a watershed moment in the acceptance of blockchain technology within established legal systems. While the ruling may pose difficulties and prompt inquiries about how decentralized governance structures might function efficiently inside established legal systems, it nonetheless represents a major step toward closing the gap between the decentralized and centralized spheres.
