CFTC Lawsuit Against Ooki DAO, $250,000 Settlement with bZx Creates New Precedents

The Commodity Futures Trading Commission (CFTC) has filed an enforcement action lawsuit against Ooki DAO, a crypto margin trading and lending platform for engaging in digital asset margin trading that only CFTC-registered Futures Commission Merchants (FCM) can perform. 

Ooki DAO also failed to adhere to customer identification requirements prescribed under the Bank Secrecy Act, the commission further alleged in its lawsuit filed in the U.S. District Court for the Northern District of California.  

CFTC Files Charges Against Ooki DAO

“The CFTC seeks restitution, disgorgement, civil monetary penalties, trading and registration bans, and injunctions against further violations of the CEA and CFTC regulations, as charged,” the Commission said in a statement on Thursday.  

The CFTC leveled the same charges against Ooki DAO’s predecessor – bZeroX, and disclosed that hadhas struck a $250,000 settlement with bZeroX and its founders, Tom Bean and Kyle Kistner. 

The agency accused Ooki of using its structure to circumvent regulatory oversight. 

“A key bZeroX objective in transferring control of the bZx Protocol (now the Ooki Protocol) to the bZx DAO (now the Ooki DAO) was to attempt to render the bZx DAO, by its decentralized nature, enforcement-proof. Put simply, the bZx founders believed they had identified a way to violate the Act and Regulations, as well as other laws, without consequence.”

Aiming to Protect Customers

Acting Director of Enforcement Gretchen said these actions are aimed at protecting US customers.  

“Margined, leveraged, or financed digital asset trading offered to retail U.S. customers must occur on properly registered and regulated exchanges in accordance with all applicable laws and regulations. These requirements apply equally to entities with more traditional business structures as well as to DAOs,” he added. 

However, Commissioner Summer Mersinger opposed the action, saying, “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.”  

Counter to DeFi’s Basic Principles

Experts believe the CFTC action runs counter to the principles of decentralized finance. It suggests that a DAO is not different from a traditionally regulated institution as far as legal responsibilities are concerned. “DAOs are not immune from enforcement and may not violate the law with impunity,” the CFTC said in its court filing.

It’s the first instance when a decentralized autonomous organization has been sued by the Commission. It’s also an indictment of the token holders who participated in the protocol’s governance process. 

In a blog on Monday, Ethereum co-founder Vitalik Buterin defended DAOs and said they can prove to be better than traditional corporations and nation-states in serving some market needs. 

However, last month NFT lending platform BendDAO was hit by an insolvency crisis after lending nearly 15000 ETH.