Jack Kubinec

<div id="highlights-block_6359a9a8d4e86" class="highlights">
 <ul>
 <li>SushiSwap, SafeDAO and Uniswap have all altered their legal structures in recent months</li>
 <li>New DAO legal structures are functionally very similar to LLCs, crypto lawyers say</li>
 </ul>
 
</div>



Major DAOs are moving to adopt legal structures as regulators ask tough questions about their legal liability.



Crypto trading platform SushiSwap just announced a new <a href="https://cms.blockworks.co/sushidao-seeks-shelter-in-cayman-islands-panama/" target="_blank" rel="noreferrer noopener">three-part legal structure for its DAO</a> and developer team. Earlier this week, Gnosis’ SafeDAO passed a <a href="https://snapshot.org/#/safe.eth/proposal/0x87c8091b5edc2cb489cc0f4231c8b675dbb1b11aa42c260c81ead9cf312f193f" target="_blank" rel="noreferrer noopener">Snapshot proposal</a> that “limits the liability of SafeDAO participants” in case the DAO gets in legal trouble. Uniswap <a href="https://cms.blockworks.co/uniswap-to-create-foundation/" target="_blank" rel="noreferrer noopener">launched a foundation</a> back in August that provides a clearer view of who is behind the DAO.&nbsp;



As crypto <a href="https://cms.blockworks.co/sam-bankman-fried-proposes-respect-for-ofac-in-crypto-regulatory-framework/" target="_blank" rel="noreferrer noopener">familiarizes itself</a> with regulators, DAOs are starting to adopt legal structures to try and get ahead of any compliance issues down the line.&nbsp;



The legally compliant DAO era could be accelerated when a decision is reached in the <a href="https://cms.blockworks.co/cftc-legally-served-ooki-dao-via-website-help-bot-court-rules/" target="_blank" rel="noreferrer noopener">CFTC’s case</a> against Ooki DAO for running an unregistered derivatives exchange. The case marks the regulators’ first lawsuit against a DAO, likely warning others in the space that they should step up their compliance efforts.&nbsp;



As regulators’ patience with DAOs runs thin, “many building in DeFi are running to whatever structures they can find to protect themselves,” <a href="https://www.linkedin.com/in/mike-wawszczak/" target="_blank" rel="noreferrer noopener">Mike Wawszczak</a>, general counsel at Alliance, told Blockworks in a Telegram message.&nbsp;



These slapped-together legal structures can cause DAOs to centralize, which is a shame, Wawszczak said, because “decentralization is the whole point.”&nbsp;



Still, that DAOs are reckoning with liability should be a relief to DAO participants.



“[Legal] wrappers provide some degree of comfort relative to a regimeless DAO,” Michael Selig, crypto lawyer at law firm Willkie Farr &amp; Gallagher, said in a message on Twitter.



And as crypto builds a financial system from the ground up, DAOs are in a sense discovering a building block of modern corporations — the limited liability corporation [LLC].&nbsp;



When corporations emerged as business structures, “the key feature of an organizational structure that was appealing from the perspective of capital formation was limited liability,” Brian Frye, a law professor at the University of Kentucky, said. “The dominant legal organizational form is actually the LLC at this point.”



Efforts to encourage the formation of DAO LLCs, such as <a href="https://sos.wyo.gov/Business/Docs/DAOs_FAQs.pdf" target="_blank" rel="noreferrer noopener">Wyoming’s recent law</a>, have been mostly unsuccessful. Wawszczak said DAO laws are unhelpful when organizations under the term are so amorphous — from centralized entities hoping to become a DAO to software using token voting to settle disagreements over upgrades.&nbsp;



Different DAOs “would use and deploy LLCs differently, and those who interact with [DAOs] might use LLCs themselves” in the same way freelance workers can use LLCs, Wawszczak told Blockworks.



But until DAOs adopt a clearer definition, Frye thinks US regulators should focus on the teams behind DAOs rather than token holders, as the CFTC indicated in its case against Ooki DAO.&nbsp;



“In a lot of ways, [token holders] are the retail investors that the regulators are, among other things, tasked with protecting,” Frye said.



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DAOs

DAOs Rush To Restructure To Avoid Legal Liability

Sebastian Sinclair

<div id="highlights-block_6352519f25f8a" class="highlights">
 <ul>
 <li>Around 18 digital-asset-related actions have been undertaken from June 2021 to June 2022, the regulator said</li>
 <li>The CFTC’s posturing highlights an ongoing power struggle between itself and the SEC over how crypto should be regulated</li>
 </ul>
 
</div>



The Commodity Futures Trading Commission (CFTC) said Thursday the crypto industry made up more than 20% of all enforcement cases filed for the 2022 financial year, as questions over which US regulator should police digital assets remain front and center.



Around 18 actions relating to digital assets were executed for the year reported, <a href="https://www.cftc.gov/PressRoom/PressReleases/8613-22" target="_blank" rel="noreferrer noopener">the commission said</a>, including against the operators of the <a href="https://cms.blockworks.co/cftc-accuses-digitex-of-shopping-illegal-crypto-derivatives/" target="_blank" rel="noreferrer noopener">Digitex Futures exchange</a> and Gemini’s alleged “<a href="https://cms.blockworks.co/cftc-steps-up-crypto-enforcement-sues-exchange-gemini-for-false-statements/" target="_blank" rel="noreferrer noopener">false and misleading</a>” statements relating to its application for a bitcoin futures contract in 2017.



Debate over which US regulator — the CFTC or the Securities and Exchange Commission (SEC) — should be the one charged with the industry’s oversight stems from arguments around the asset class’ definition as either a commodity or a security.



The SEC — charged with overseeing securities regulation in the US — wants full control over how it polices most of the privately created digital coins on the market, including stablecoins.&nbsp;



It draws its reasoning from a more than 80-year-old Supreme Court case and seeks to apply that same reasoning to digital assets, which, <a href="https://twitter.com/TuongvyLe12/status/1580626371298021377?s=20&amp;t=uo6iGZvJUtFG0DSQtzx4BA" target="_blank" rel="noreferrer noopener">according to some</a>, is not without its pitfalls.



The CFTC, meanwhile, is also vying for that same control, as it would bring additional revenue to the respective agencies whilst bolstering their mandates over certain financial instruments.



<h3 class="wp-block-heading">CFTC and SEC battle for King of the Hill</h3>



In a surprising move, SEC chair Gary Gensler last month said he <a href="https://cms.blockworks.co/gensler-on-board-with-cftc-taking-over-bitcoin-oversight/" target="_blank" rel="noreferrer noopener">would be happy</a> for the CFTC to regulate bitcoin — the world’s largest crypto by market capitalization —  and “other non-security tokens” while his agency had the pick of the rest.



For years, the SEC has attempted to define crypto as securities, which would bring most crypto under its purview. The regulator has pursued legal action against several high-profile industry-related firms including Ripple Labs, whose legal fight still lingers, pending an outcome in a <a href="https://cms.blockworks.co/ripple-and-the-sec-agree-on-one-thing-let-the-judge-decide-xrps-fate/" target="_blank" rel="noreferrer noopener">US district court</a>.



Earlier this year, the regulator alleged in a complaint against a <a href="https://cms.blockworks.co/sec-charges-former-coinbase-product-manager-with-insider-trading/" target="_blank" rel="noreferrer noopener">former Coinbase product manager</a> that <a href="https://cms.blockworks.co/qa-the-sec-classified-9-tokens-as-securities-now-what/">nine crypto tokens were </a>securities, seemingly a bid to establish a legal precedent over the asset class.



Regardless, the CFTC continues to plow ahead in its own ambition to be the premier industry regulator. Last month, the commission simultaneously filed and settled its case against decentralized autonomous organization <a href="https://cms.blockworks.co/cftc-pursues-first-case-against-a-dao/" target="_blank" rel="noreferrer noopener">bZeroX DAO</a> and its founders for facilitating margined and leveraged retail commodity transactions.



That marked the first time the CFTC had brought an action against a DAO.



A week later, a Judge ruled the CFTC had sound legal footing to serve a summons to bZeroX DAO successor, Ooki DAO, through its <a href="https://cms.blockworks.co/cftc-legally-served-ooki-dao-via-website-help-bot-court-rules/" target="_blank" rel="noreferrer noopener">online help chat box</a>. That action <a href="https://cms.blockworks.co/dao-gains-venture-capital-ally-in-cftc-suit/" target="_blank" rel="noreferrer noopener">raised eyebrows</a> among lawyers working with the industry.



While the debate over how to define crypto continues, it is ultimately up to congress to decide which regulator will take the reins.&nbsp;



Senators in August introduced their <a href="https://cms.blockworks.co/new-cftc-bill-could-overrule-sec-but-leaves-fate-of-many-crypto-tokens-unresolved/" target="_blank" rel="noreferrer noopener">Digital Commodities Consumer Protection Act</a>, suggesting the CFTC should be the one to control crypto’s spot markets, namely bitcoin and ether but potentially others.



With mounting cases brought against defendants in the 2022 financial year, the CFTC, at least for now, could be demonstrating its willingness to heed that call.



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CFTC Racked Up Crypto Enforcement Record in Past Year

Shalini Nagarajan

<div id="highlights-block_634e587917466" class="highlights">
 <ul>
 <li>“The community of people making decisions on the DAO is fluid, ever-changing and different for each proposal on which they vote,” Paradigm said</li>
 <li>It argues the CFTC should identify and serve its lawsuit against individual DAO members</li>
 </ul>
 
</div>



Crypto venture capital firm Paradigm has <a href="https://github.com/LeXpunK-Army/Crypto-CaseLaw/blob/main/bZx%20DAO%20Case/paradigm_amicus.pdf" target="_blank" rel="noreferrer noopener">filed a motion</a> to join other parties in arguing that the Commodity Futures Trading Commission (CFTC) improperly served members of Ooki DAO.&nbsp;



The CFTC <a href="https://cms.blockworks.co/cftc-pursues-first-case-against-a-dao/" target="_blank" rel="noreferrer noopener">controversially sued Ooki DAO</a> in September, alleging that it facilitated unregistered margined and leveraged crypto trading products for US residents.



In the Monday filing, Paradigm said the Commission should seek to hold accountable only those who directly contributed to Ooki’s registration requirements under the Commodity Exchange Act. Paradigm argues DAO members should have been served a summons directly, rather than through a general website chat bot.



“A key characteristic of DAOs is that unrelated, anonymous people come together to decide whether to adopt ad hoc proposals about how to run the underlying protocol,” the firm said in the motion requesting to file an <a href="https://www.law.cornell.edu/wex/amicus_curiae" target="_blank" rel="noreferrer noopener">amicus brief</a>. An amicus refers to a party intending to influence the court’s decision, as it holds a substantial interest in the matter.



“A person might choose to participate once or many times, but the community of people making decisions on the DAO is fluid, ever-changing and different for each proposal on which they vote,” Paradigm added.



The regulator had settled charges against the DAO and its founders Tom Bean and Kyle Kistner, but it was unable to identify key figures attached to the DAO&nbsp; — so it served its court summons through Ooki’s website chat bot.&nbsp;



The news was met with some disbelief over whether the CFTC was serious about bringing forward a complaint against every individual member of a DAO.



<h3 class="wp-block-heading">Other groups support Ooki DAO against CFTC action</h3>



Last week, US District Judge William Orrick ruled that two crypto advocate groups — who asked to join the case — could argue the CFTC shouldn’t be able to serve the DAO through a website help bot. LeXpunK Army and the DeFi Education Fund both have filed for permission to add amicus briefs similar to Paradigm’s.



Paradigm has joined them, saying identifying all voting token holders as “members” of the same associations “threatens to seriously distort the law.”



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">While we are not a party to the case, we thought it was necessary to speak up against the CFTC’s attempt to expand liability to unsuspecting technology users and impair the ability of DAOs to operate in the US.&mdash; Rodrigo (@RSSH273) <a href="https://twitter.com/RSSH273/status/1582051230007799816?ref_src=twsrc%5Etfw">October 17, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



Since being served, the DAO appears to have geo-fenced users with IP addresses located in the US. It was set a deadline to respond to the allegations by Oct. 13, but that date has passed with no filing from the DAO.



A hearing has been set for Nov. 30 where the various parties will be allowed to present their views.



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CFTC

DAO Gains Venture Capital Ally in CFTC Suit

<div id="highlights-block_633bf8e68f5a4" class="highlights">
 <ul>
 <li>The DAO is embroiled with the CFTC for allegedly operating a crypto derivatives platform outside of the law</li>
 <li>Ooki DAO is the successor to bZeroX, which has already settled similar charges with the CFTC</li>
 </ul>
 
</div>



Decentralized autonomous organization Ooki has been dealt another legal blow: A court has ruled the Commodities and Futures Trading Commission (CFTC) effectively served a summons via its online help chat box.



Ooki is a blockchain-powered protocol for borrowing, lending, margin trading and staking. It enables DeFi apps to service traders keen on making leveraged bets, both long and short, across crypto markets.&nbsp;



It is the successor to bZeroX, which the CFTC <a href="https://www.cftc.gov/PressRoom/PressReleases/8590-22" target="_blank" rel="noreferrer noopener">simultaneously</a> filed and settled charges with on Sept. 23 in its first ever case against a DAO.



At the same time, the CFTC levied analogous allegations against Ooki, labeling it liable as an &#8220;unincorporated association.&#8221;



The CFTC found bZeroX had facilitated margined and leveraged retail commodity transactions outside the law between July 2019 and August 2021. Its founders were forced to pay $250,000 for their involvement.



Now, the CFTC is after Ooki. The agency served the <a href="https://cms.blockworks.co/cftc-pursues-first-case-against-a-dao/" target="_blank" rel="noreferrer noopener">revamped</a> protocol late last month, alleging it had been operating for years without registering as a futures commission merchant, but questions had remained over whether the CFTC had sufficiently served its charges.



Ooki’s chat box, like other online assistants, provides automated responses to questions or queries potential customers may have relating to the organization. The CFTC lodged its filings through that portal.



The US Northern District Court of California ruled the CFTC was justified in serving a copy of its court summons and complaint to Ooki in this way, opening up potential ramifications for similar cases in the future.



It’s also unclear exactly who is responsible: the protocol founders, the DAO or its voting members. Both the DAO and its members could be simultaneously held liable for operating the platform outside of what the CFTC deems the law. 



Etherscan <a href="https://etherscan.io/token/0x0De05F6447ab4D22c8827449EE4bA2D5C288379B" target="_blank" rel="noreferrer noopener">shows</a> around 1,200 addresses hold Ooki’s native token, which currently trades 92% below its all-time high recorded in December. The DAO itself counts 103 members, according to <a href="https://snapshot.org/#/ooki.eth" target="_blank" rel="noreferrer noopener">snapshot.org</a>.



Members of Ooki DAO were also alerted to the CFTC’s summons and complaint through an online forum designated for governance discussions on Sept. 28.



Ooki now has until Oct. 13 to respond to the <a href="https://storage.courtlistener.com/recap/gov.uscourts.cand.400807/gov.uscourts.cand.400807.17.0.pdf" target="_blank" rel="noreferrer noopener">allegations</a>, otherwise the CFTC could face default judgment, CoinDesk reported.



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bZeroX

CFTC Legally Served Ooki DAO via Website Help Bot, Court Rules

Casey Wagner

<div id="highlights-block_633728508d189" class="highlights">
 <ul>
 <li>CFTC’s latest filing shows regulation by enforcement may be a trend here to stay</li>
 <li>Digitex’s founder is also alleged to have been involved in a ‘pump and dump’ scheme for the exchange’s native token</li>
 </ul>
 
</div>



As industry participants closely monitor how US cryptocurrency regulation is shaping up, the CFTC has yet another digital assets derivatives shop on its enforcement radar.&nbsp;



The watchdog on Friday filed a complaint against Adam Todd, founder of futures and derivatives trading platform Digitex.&nbsp;



According to the complaint, filed in the Southern District of Florida, Todd “owned, built, and operated an illegal digital asset derivatives trading platform.”&nbsp;



Todd also “attempted to manipulate the price of DGTX,” the exchange’s native token, by trying to “pump” its price on third-party exchanges, the CFTC alleges. DGTX, now trading at a fraction of a cent, is down about 8% in the past hour, per <a href="https://www.coinbase.com/price/digitex" target="_blank" rel="noreferrer noopener">Coinbase</a>. 



The CFTC is seeking monetary penalties, to be determined by a judge — plus complete repayment of funds to all customers and investors impacted by the alleged violations. The regulator also hopes a judge will rule that the exchange must shut down.



“Unless restrained and enjoined by this Court, Defendants are likely to continue to engage in the acts and practices alleged in this complaint and similar acts and practices, as more fully described below,” the complaint said.&nbsp;



Digitex’s <a href="https://digitex.io/" target="_blank" rel="noreferrer noopener">website</a> appeared to be down Friday following the filing. The exchange did not immediately respond to a request for comment. 



The filing comes shortly after the CFTC <a href="https://cms.blockworks.co/cftc-pursues-first-case-against-a-dao/" target="_blank" rel="noreferrer noopener">settled its charges</a> against Ooki DAO predecessor  bZeroX. According to the regulator, bZeroX, as well as founders Tom Bean and Kyle Kistner, have been ordered to pay $250,000 for their roles in deploying, marketing and soliciting customers to undertake transactions that did not occur on a designated market contract. 



Ooki DAO now faces similar charges, the CFTC said, as the DAO is allegedly operating the same software as bZeroX. The regulator is seeking restitution, disgorgement, civil monetary penalties, trading and registration bans as well as injunctions against further violations.



The enforcement actions come amid an uncertain regulatory environment for cryptocurrencies, made increasingly murky by the continued jurisdictional battle between regulators.



Earlier this month, SEC Chair Gary Gensler said the CFTC can have authority over bitcoin and other unspecified “non-security tokens.” Gensler’s team can take the rest of the industry, he suggested, but the decision ultimately <a href="https://cms.blockworks.co/bitcoin-ether-to-be-regulated-as-commodities-by-cftc-per-new-senate-bill/" target="_blank" rel="noreferrer noopener">rests with</a> Congress.



“The two agencies work very collaboratively,” ​​Valerie Szczepanik, director of the Strategic Hub for Innovation and Financial Technology (FinHub) office at the SEC, said during a <a href="https://www.youtube.com/watch?v=DZdj3p1_13c" target="_blank" rel="noreferrer noopener">panel discussion</a> at the Digital Asset Summit in New York earlier in September. “From my perspective, the agencies really want to get it right. It’s all about investor protection and market integrity and our two agencies want to cover the landscape so those goals are achieved.”



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CFTC Accuses Digitex of Shopping ‘Illegal’ Crypto Derivatives

<div id="highlights-block_632d6c4e78003" class="highlights">
 <ul>
 <li>bZeroX’s protocol facilitated unlawful margined and leveraged retail commodity transactions on its platform between 2019 and 2021, the CFTC said Thursday</li>
 <li>Its DAO was operating without having first registered as a futures commission merchant, the regulator said</li>
 </ul>
 
</div>



The Commodity and Futures Trading Commission (CFTC) has filed and settled charges against a decentralized autonomous and its founders for facilitating margined and leveraged retail commodity transactions, which they say operated outside the law for years.



The bZeroX DAO deployed, marketed and made solicitations to customers under a protocol of the same name to undertake transactions considered unlawful because those transactions did not occur on a designated market contract, the CFTC said in a <a href="https://www.cftc.gov/PressRoom/PressReleases/8590-22" target="_blank" rel="noreferrer noopener">statement</a> Thursday.



According to the regulator, bZeroX, as well as founders Tom Bean and Kyle Kistner, have been ordered to pay $250,000 for their involvement.



The bZeroX platform was subjected to a <a href="https://bzx.network/blog/prelminary-post-mortem" target="_blank" rel="noreferrer noopener">phishing attack</a>, in November 2021, which extracted stablecoins and DeFi tokens and <a href="https://cms.blockworks.co/hacked-dao-faces-lawsuit-as-users-try-to-recoup-stolen-funds/" target="_blank" rel="noreferrer noopener">prompted a class action lawsuit</a>, though the CFTC is not considering that as part of its filing.



Acting as a pseudo trading marketplace from July 2019 to August 2021, the CFTC said the DAO’s protocol allowed users to take leveraged positions but that bZeroX was operating without having first registered as a futures commission merchant.&nbsp;



The DAO and its founder also failed to adopt know-your-customer procedures under the Bank Secrecy Act, the CFTC said. It&#8217;s believed to be the first such case the regulator has brought against a DAO.



Ooki DAO — a successor to bZeroX — also faces similar charges, the CFTC said. Ooki is said to be operating the same software as bZeroX. As such, the CFTC is seeking restitution, disgorgement, civil monetary penalties, trading and registration bans as well as injunctions against further violations.



While the case is unique based on the involvement of what is perceived as a decentralized organization, the regulator’s move aligns with sentiments laid out last week by CFTC Chair <a href="https://cms.blockworks.co/cftc-preparing-to-oversee-crypto-behnam-tells-senators/" target="_blank" rel="noreferrer noopener">Rostin Behnam</a>.



Behnam told the Senate Agriculture Committee his agency has already begun preparations to take the reins as the primary regulator for the crypto industry.&nbsp;



While the regulator attempts to position itself as the main authority over the new asset class, the SEC has been vying for similar oversight.



Earlier this month, SEC chair Gary Gensler said the CFTC can have authority over bitcoin and other unspecified “non-security tokens,” the securities regulator in turn, it would take charge over all other cryptos. 



The decision ultimately <a href="https://cms.blockworks.co/bitcoin-ether-to-be-regulated-as-commodities-by-cftc-per-new-senate-bill/" target="_blank" rel="noreferrer noopener">rests with</a> Congress, which will have to decide whether either regulator is deemed fit enough to police the industry or whether the creation of an entirely new oversight body is preferred.



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<li><a href="https://blockworks.co/newsletter/thedrop">The Drop</a>: Apps, games, memes and more.</li>



<li><a href="https://blockworks.co/newsletter/supplyshock">Supply Shock</a>: Bitcoin, bitcoin, bitcoin.</li>
</ul>