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Regulators detail the first DAO sanctions: defending Token holders

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Why is there a loophole in the CFTC's lawsuit against Ooki DAO?

Title of the original article: Dissenting Statement of Commissioner Summer K. Mersinger Regarding Enforcement Actions Against: 1) bZeroX, LLC, Tom Bean, and Kyle Kistner; and 2) Ooki DAO

Original article by Summer K. Mersinger

Peter Pan @blockbeats

On September 22, the Commodity Futures Trading Commission (CFTC) issued an order in a press release on Thursday, In the United States District Court for the Northern District of California v. bZeroX, LLC (which later transferred control of the bZx Agreement "Now Ooki Agreement" to the bZx DAO "Now Ooki DAO") and its founders Tom Bean and Kyle Kistner filed a federal civil enforcement lawsuit, Accused of illegally providing leverage and margin retail goods trading in digital assets; Engage in activities that only registered futures commissioners (FCM) can carry out; Failure to adopt a customer identification program as part of a Bank Secrecy Act compliance program as required by the FCM.

The activities in which Ooki DAO was involved were related to a decentralized blockchain-based software protocol that functioned like a trading platform, the CFTC said. The CFTC also argued that Ooki DAO used its structure to evade regulation and never registered with the commission in any capacity. It designated Ooki DAO as an "unincorporated association of Ooki Token holders" and ordered it to pay a $250,000 civil penalty, And cease further violations of the Commodity Exchange Act (CEA) and CFTC regulations as alleged.

In response to the lawsuit, Gretchen Lowe, acting director of enforcement, said, "This action is part of the CFTC's broader efforts to protect American customers in a rapidly evolving, decentralized financial environment. Trading in margin, leveraged or financed digital assets offered to U.S. retail customers must be conducted on an appropriately registered and regulated exchange in accordance with all applicable laws and regulations.These requirements also apply to entities with more traditional business structures as well as DAOs."

However, Commissioner Summer K. Mersinger of the CFTC took issue with the enforcement action and issued the following statement of objections, which BlockBeats translated:

An overview of the

Today, the committee was asked to consider novel and complex questions about how our governing regulation, the Commodity Exchange Act (CEA), applies to digital assets, blockchain technology, and decentralized autonomous Organizations (DAOs). But these technologies did not exist when the law was enacted in 1974, and they have only just begun to develop since Congress last amended the law in 2010 as part of Dodd-Frank, the Dodd-Frank Wall Street reform and consumer protection law.

Unfortunately, I cannot support the Committee's approach to this particular issue. While I do not condone individuals or entities who flagrant violate the Commodity Exchange Act or our regulatory rules, we cannot arbitrarily determine who is responsible for these violations in the federal and state policymaking process based on an unsubstantiated legal theory that amounts to regulation through enforcement. For these reasons, I disagree on this matter.

First, I support part of the Commission's enforcement action in this matter:

The Commission is issuing a settlement order finding that bZeroX, LLC violated the exchange trading and registration requirements of the Commodity Exchange Act, as well as the CFTC's anti-money laundering rules for accepting orders for blockchain-based software protocols used to facilitate margin and leveraged retail goods trading.

The settlement order further finds Tom Bean and Kyle Kistner, co-founders and co-owners of bZeroX, LLC, responsible for and responsible for those violations pursuant to the provisions of Section 13(b) of the Commodity Exchange Act regarding Controller's liability for those violations. There is nothing particularly new or unusual about these allegations against legal entities, and I would vote to approve this settlement if it were based solely on these findings.

But because Bean and Kistner transferred control of the agreement to Ooki DAO and the agreement continued to operate in the same illegal manner, the Commission also filed an injunctive enforcement action through a complaint accusing Ooki DAO of engaging in the same violations as an unincorporated association. Of course, I agree that illegal conduct under the Commodity Exchange Act and CFTC rules, whether conducted by a company or an unincorporated association, is unacceptable.

The principle of state law is that members of a for-profit unincorporated association are jointly and severally liable for the debts of the association, and Bean and Kistner, as members of the Ooki DAO unincorporated Association, are therefore held liable for violations of the Commodity Exchange Act and CFTC rules by Ooki DAO. But in his settlement order and suit,The committee defined the unincorporated Association of Ooki DAOs as holders of Ooki tokens who vote on governance proposals regarding the operations of the business. This definition stems from the fact that Bean and Kistner belong to Ooki Token holders.

For multiple reasons, I disagree with the committee's approach to determining the liability of DAO Token holders based on their participation in governance votes.

1) First of all,Not only does this approach not rely on any legal provision in the Commodity Exchange Act, but it also does not rely on any case law relating to such litigation.Instead, the Commission's approach has been to impose government sanctions for violations of the Commodity Exchange Act and CFTC rules based on inapplicable state law theories developed for contract and tort disputes between private parties;

2) Second, this approach arbitrarily defines Ooki DAOs as unincorporated associations in an unfair way and undermines the public interest by inhibiting good governance in the newly encrypted environment;

3) Moreover, this practice constitutes blatant "regulation by enforcement," which sets policy based on new definitions and standards that have never been articulated before by the commission or its staff, and without public consultation;

4) Finally, the Commission ignored that Ooki DAO's violations of the Commodity Exchange Act and CFTC rules in this case could be held accountable through the "aiding and abetting liability" clause. It was specifically authorized by Congress to address these issues.

Although there are no allegations of fraud occurring here, we are all aware of the need to protect our customers who participate in the largely unregulated crypto space. But these good intentions do not empower the Commission to pass enforcement actions without proper legal authority, notice, or public opinion. In the following, I will elaborate on these four points in detail.

Lack of applicable legal authority

There is nothing in the Commodity Exchange Act that requires a member of a for-profit unincorporated association to be personally liable for violations of the Act or CFTC rules by the association solely on the basis of his or her status as a member of the association. Yes, the Commodity Exchange Act applies to associations, and the difference here is that the commission is trying to determine who is and is not responsible for the association's violations of the Act and CFTC rules.

The Commodity Exchange Act sets out three legal theories on which the Commission may base its support for charging a person with violations of the Act or CFTC rules:Principal-agent responsibility,Aiding and abetting liability,Control human responsibility. The Commission's settlement order does not cite a single provision of the Commodity Exchange Act or federal common law to support such a view.

However, based on Bean's and Kistner's status as Ooki DAO's voting Token holders, the settlement order holds Bean and Kistner personally liable for Ooki DAO's violations of the Commodity Exchange Act and CFTC rules. In doing so, the commission relied on only two contractual disputes and one tort case -- both between private parties and both decided under state law -- suggesting that individual members of for-profit unincorporated associations were personally liable for their debts.

At the same time, the Commission is not simply collecting Ooki DAO's outstanding contractual obligations. On the contrary,It is imposing sanctions that only the government can impose - civil penalties ($250,000), cease and desist orders, and bans on future participation in Ooki DAO activities, for beans and Kistner based solely on their status as voting Token holders of the Ooki DAO, may object to others using Ooki tokens to vote on governance issues in the future.

I am skeptical of any federal or state government agency exercising sanction power in this manner, that is, based on the legal theory of state common law contracts and tort cases between private parties. Nor do I see any indication that Congress intended the CFTC to do so - rather than relying on the principal agent, aid and abet, and controller liability provisions it specifically created for the CFTC in the Commodity Exchange Act.

Definition of unfairness to unincorporated associations

As previously mentioned, the Commission's settlement orders and complaints will be arbitrary.Ooki DAO Unincorporated AssociationBe defined by itsOoki Token holderComposition. I suspect the committee chose this definition of the unincorporated Association of Ooki DAO, as this definition may be the best place to take enforcement action against Ooki DAO. But this choice has consequences, and from a broader policy and social perspective, the commission draws the line of definition in a place that leads to unfair outcomes and harms the public good.

Defining the Ooki DAO unincorporated association as people who vote with their Token would essentially create an unfair distinction between Token holders. For example, suppose that during the period when Token holders A and B hold voteable DAO tokens, Token holder A votes on them but Token holder B does not. As defined by the Commission, Token Holder A has now become A member of the unincorporated association and is (potentially unknowingly) personally liable and subject to CFTC sanctions for any violation of the Commodity Exchange Act by Ooki DAO, Token holder B, who happens not to vote on the random governance proposal, is not personally responsible.

As a result,The way the commission defined it was grossly unfair. More importantly, it will certainly discourage votes for general participation in DAO governance, especially among those who may wish to vote in a way that achieves compliance with the law. The Commission's approach will thus have a chilling effect against voting, thus impeding good governance and making it difficult to develop a culture of compliance in this context. From the way the Commission defined this enforcement action, it is clear that people in the DAO community should not vote, even if the governance vote encourages compliance with the law.

In short: The line chosen by the Commission in its definition of the Ooki DAO unincorporated Association, insisting on drawing the line on who joins and leaves the DAO unincorporated association, inevitably leads to unfair results and harms the public interest in good governance.

Law enforcement supervision

In addition, the Commission's approach in this action will have public policy implications well beyond this particular settlement and litigation, namely that the Commission made this consequential decision without any announcement or opinion, which is regulation through enforcement.

Admittedly, the Commodity Exchange Act does not give the Commission the power to regulate Ooki DAO. However, I do not know why the Commission cannot engage in public notification and comment rulemaking to raise the rules for such novel and difficult public policy issues. To be specific: who is a member of the unincorporated association DAO; And under what circumstances, within the statutory authority granted by Congress to the Commodity Exchange Act, will the Commission be held personally liable for the DAO's violations of the Commodity Exchange Act and CFTC rules?

Rulemaking will benefit the Commission by providing us with information, views and public input from all parties involved. For example, this public input could:

- Address the potential impact of the Commission's approach adopted here on the developing decentralized financial ecosystem;

- Highlight the possible consequences of the commission's approach for non-corporate organizations other than the DAO;

- To provide alternative methods that we may believe can better achieve our mission as set out in the Commodity Exchange Act.

We benefit from public comment on various rulemaking related to the administration of our Commodity Exchange Act. These questions are, of course, important enough for us to seek such advice here.

Equally important, the rulemaking process will inform the way public committees think about these important issues. There is obviously no such notice before proceeding with this command.

One can search the CFTC's records and not find a single statement about what the commission, its chair, the director of a department or office of the Commission, or the commission staff told the public: Based on state law contracts and tort cases between private parties, the CFTC holds that members of an unincorporated association are personally liable for violations of the Commodity Exchange Act or CFTC rules by the association; Or the CFTC considers that any person who governs Token voting by the DAO is a member of the DAO and is therefore personally liable and sanctioned for violations by the DAO.

However, if for whatever reason there is a reluctance to get involved in rulemaking, there are many other levers the Commission can use to shed light on these important policy issues.

In short, the Commission should not hide its views on these policy issues, which can only be revealed through enforcement actions, and it should not delegate its decision-making responsibility to the federal judges who hear those enforcement actions. Instead, the commission should communicate with and interact with the public in a transparent manner and seek input from people with expertise to share.

"Aiding and abetting Liability"

I am disappointed that the committee decided to proceed in this way because there could have been a better way. In other words, the Commission could have relied on"Aiding and abetting Requirement" of Section 13(a) of the Commodities Exchange ActFinding Bean and Kistner personally responsible for the Ooki DAO violation, rather than enforcing the law on the basis of one's identity rather than culpability.

Bean and Kistner initiated Ooki DAO's violation of the Commodity Exchange Act and CFTC rules by setting it up to run a protocol like the one they ran through bZeroX, LLC, which was run in violation of the Commodity Exchange Act and CFTC rules. They then publicly announced that they were transitioning to a structure that they believed would exempt the activity from any requirement to comply with United States law. Moreover, Bean and Kistner, after transferring control to the Ooki DAO, continued to market and solicit the public to trade on the agreement.

I believe this compelling evidence shows that Bean and Kistner meet the standards for aiding and abetting liability under the Commodity Exchange Act, and this finding will hold them liable for Ooki DAO's violations of the Commodity Exchange Act and CFTC rules.

Therefore, the aid and abettion standard developed in the Commodity Exchange Act can be used to:

- will achieve the same result in holding Bean and Kistner personally liable for the Ooki DAO violations;

-Also enables the Commission to articulate its views: I agree that a decentralized organization cannot be subject to the legal requirements of the Commodity Exchange Act and CFTC rules;

- addresses concerns about legal authority, unfair outcomes, repression of good governance, lack of public attention and the aforementioned enforcement oversight.

conclusion

The principles that guide our enforcement are designed to be technology neutral, and our enforcement principles should remain the same regardless of the underlying technology:

-Comply with the powers granted to the Commission by Congress in the Commodity Exchange Act;

- Greater fairness in the way it is defined in the enforcement process;

- Incentives for behaviour aimed at enhancing compliance with the law;

- Seeking public views on the major policy issues before us;

- Transparency on who will be held accountable and for what.

These principles have served the CFTC well throughout its more than 45-year history, including periods of incredible technological innovation, such as the shift in futures trading from open outcry to electronic trading. Today's action, however, abandons those principles. Therefore, I object to parts of this lawsuit.