Government regulators achieved a significant legal victory as a federal judge ruled that a decentralized cryptocurrency collective had violated commodities exchange rules. However, the challenge now lies in enforcing the judgment and getting the collective to pay the fines. The recent ruling by Judge William Orrick in San Francisco supports the notion that regulators and private plaintiffs have a legal basis for suing decentralized autonomous organizations (DAOs).
The key obstacle in collecting a legal judgment against a DAO is the decentralized and anonymous nature of its members, who often lack formal organization. Judge Orrick ordered the DAO named Ooki, sued by the U.S. Commodity Futures Trading Commission (CFTC), to pay a $643,542 fine and issued an order to take down the associated website and blockchain-based app used for virtual currency trading.
This ruling comes at a time when regulators are increasing their scrutiny of the cryptocurrency industry. The U.S. Securities and Exchange Commission (SEC) recently filed lawsuits against major cryptocurrency exchanges, including Binance and Coinbase, alleging illegal trading operations. While these actions are separate from the legal questions surrounding decentralized finance (DeFi), they highlight the broader regulatory landscape.
Unlike centralized exchanges, DeFi protocols operate autonomously, often subject to control through majority votes by members. DAOs consist of individuals who hold equity in the respective protocol through proprietary tokens. The transparency of member identities varies based on the DAO’s structure.
Ooki DAO, operating on the Ethereum blockchain, allowed users to invest and speculate on virtual currencies. Judge Orrick ruled that the protocol functioned similarly to a trading platform, qualifying it as an exchange under the Commodity Exchange Act. The transfer of control from bZeroX, the original LLC, to the DAO seen via the CFTC as an attempt to shield the protocol from regulatory oversight.
The CFTC’s lawsuit against Ooki DAO is among the first to address the application of U.S. laws to a DAO. Another lawsuit involving a crypto-saving protocol called PoolTogether was dismissed, with the judge stating that the case was better suited for state court.
Legal experts believe Judge Orrick’s rulings will play a significant role in future cases involving DAOs. By categorizing Ooki DAO as an “unincorporated association” and a “person” under the Commodity Exchange Act, he emphasized that DAOs must comply with existing laws and regulations.
Ooki DAO Judgment Remains Uncertain
Although the judgment against Ooki DAO was imposed, it remains uncertain how the CFTC plans to enforce it. The DAO did not have a representative appear in court, and DeFi advocacy groups submitted amicus briefs in its support. Identifying DAO members and locating their assets could prove challenging, raising questions about the practicality of collecting fines.
While the court rulings provide regulatory clarity regarding DAOs, the decentralized and often anonymous nature of these organizations presents unique enforcement hurdles. Efforts to ensure legal accountability and protect the public from potential risks associated with DAOs continue to be an ongoing challenge for regulators and law enforcement agencies.
