A decentralized autonomous organization, or DAO, is a blockchain-based form of organization or company that is often governed by a native crypto token. Holders of these tokens gain the ability to vote on important matters directly related to the DAO. DAOs typically use smart contracts to coordinate the efforts and resources of many towards common aims.
As such, DAOS are an emerging business structure in the crypto world. However, they rarely are a legal method for incorporation, except in Wyoming and Tennessee which permit the use of a DAO LLC to incorporate and limit individual liability.
On September 22, 2022, the CFTC sued the blockchain company bZeroX, its founders, and Ooki DAO, a crypto collective associated with the company. A quick interesting (at least I think) sidenote—the CFTC notified the DAO of the lawsuit via a help chat box and a notice on the DAO’s online forum—as the manner of service. In turn, criticism and question circulated over whether the CFTC clearly identified the defendants in the matter. Ultimately, the CFTC was ordered to amend how they served notice and to serve notice on identifiable defendants. Like many other suits in crypto, the CFTC here accused them of illegally selling commodities and futures. Specifically, bZeroX’s software allows crypto traders to buy and sell cryptocurrencies on margin. However, unlike other cases in the crypto sphere, this was the CFTC’s first case against a DAO.
In forming a DAO, the founders of bZeroX thought they were protecting themselves and the company from legal liability. In fact, one of the founders stated, “[i]t’s really exciting. We’re going to be really preparing for the new regulatory environment by ensuring bZx is future-proof. So many people across the industry right now are getting legal notices and lawmakers are trying to decide whether they want DeFi companies to register as virtual asset service providers or not – and really what we’re going to do is take all the steps possible to make sure that when regulators ask us to comply, that we have nothing we can really do because we’ve given it all to the community.” In response, the CFTC affirmatively concluded “DAOs are not immune from enforcement and may not violate the law with impunity.”
On December 20, 2022, the U.S. District Court for the Northern District of California concluded that Ooki DAO could be sued because Ooki DAO was an unincorporated association. Accordingly, DAO members must be on alert since a DAO is not a shield even if members are able hide behind pseudonyms—liability supersedes anonymity.
Order to Show Cause – #59 in Commodity Futures Trading Commission v. Ooki DAO (N.D. Cal., 3:22-cv-05416) – CourtListener.com
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