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The obscure DAO at the center of a case that could determine the future of crypto

October 25, 2022, 6:41 PM UTC
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A court case against Ooki DAO could threaten the future of decentralization.
Illustration by Fortune

In the weeks after the U.S. Commodity Futures Trading Commission (CFTC) took unprecedented action against Ooki DAO on Sept. 22, confusion reigned over the organization’s affiliated Telegram channels. “What a clusterfuck,” wrote one user in an unofficial trading group. “Why were we kept in the dark???” 

Bewilderment is a sentiment shared by many regarding Ooki DAO, from top crypto lawyers to former CFTC employees to people just trying to figure out what a DAO is. All they seem to agree on is that the case has existential implications for a burgeoning sector of the crypto industry.

A DAO, or decentralized autonomous organization, is a type of entity where decisions are collectively made by members who hold crypto tokens for the project, rather than by a central governing body. The most famous example is ConstitutionDAO, where people banded together to try to buy one of the 13 surviving copies of the U.S. constitution in late 2021.

As an offshoot of a centralized exchange that facilitated margin trading for different crypto assets, Ooki DAO was a decidedly less intrepid effort. The founders of the exchange, a limited liability corporation called bZeroX, decided to transform the company into a DAO in late 2021 in hopes it would be “future-proof” from any regulation.

“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,” one of the founders said in a phone call to community members before transferring control to the DAO.

The CFTC, the regulatory agency that oversees commodity trading, disagreed with that assertion and filed charges against bZeroX and its two founders in late September—a move that few in the crypto world found much fault with.

But instead of stopping there, the CFTC brought a simultaneous enforcement action against the DAO, arguing that every voting member of Ooki DAO also was liable. The move sent a seismic wave through the crypto world, with many worried the new theory of liability would throw into question the entire purpose of DAOs, which is to have decentralized decision-making.

“DAOs are fundamentally a coordination tool, but if nobody is willing to vote, it hampers the development of the technology,” Rodrigo Seira Silva-Herzog, crypto counsel at VC firm Paradigm, told Fortune. 

Others were more skeptical about the future of the technology, given the enforcement action.  

“It is possible that DAOs are just the worst of all worlds: Their tokens are similar enough to corporate shares to be subject to securities laws, but different enough to create unlimited liability for their holders,” wrote Bloomberg columnist Matt Levine in his popular Money Stuff column.

A CFTC representative declined to comment. 

Alternative service

The matter got stranger because of how the CFTC chose to notify Ooki DAO members of the charges. Because of the decentralized and anonymous structure of the DAO, the CFTC argued there were “significant obstacles to traditional service of process.” The agency was unable to identify the individuals, or even a physical location where a summons and complaint could be mailed. Instead, the CFTC served Ooki DAO through a help chat box and forum on the organization’s website. 

“If I throw a subpoena in the middle of Union Square and people are talking about it, it doesn’t mean the actual party got served,” said Justin Slaughter, policy director at Paradigm.  

Speaking at an industry event on Monday, George Mason University law professor J.W. Verret argued the CFTC chose the chatbot route hoping no one would respond: “They would get a default judgment, and then they would hold the default judgment to the world and say, ‘DAOs are a violation, and therefore no DAOs.’” 

“If I throw a subpoena in the middle of Union Square and people are talking about it, it doesn’t mean the actual party got served.”

Justin Slaughter, policy director at Paradigm

A former CFTC senior staffer, who spoke with Fortune on the condition of anonymity, said that enforcement at the agency is largely autonomous, meaning that staffers handle the language of enforcement actions before getting the sign-off from commissioners. As a result, enforcement cases like this one tend to not be guides for precedential decisions.

Even so, the former staffer cautioned that it could get the ball rolling: “It might be the case the CFTC didn’t intend to do this, but all the same, it is now moving in a direction where they could hold that this applies, and a court could approve it, and then we have precedent.”

‘Crypto war for liberty’

The charges became much bigger than Ooki DAO, with the CFTC’s case morphing into a new bellwether for a fundamental question within crypto, like the SEC’s ongoing battle with Ripple over the definition of a crypto security. The difference is that Ripple is a company valued at $15 billion in early 2022, while Ooki DAO is an assortment of Telegram and Discord users with its own sticker collection

More powerful players have joined the fray.

In mid-October, District Judge William Orrick of the U.S. District Court for the Northern District of California granted leave to two prominent crypto organizations to file amicus briefs in support of the defendants: the policy-focused DeFi Education Fund and LeXpunK Army, a collective of lawyers and developers. The VC firm Paradigm joined Oct. 20.

“These are questions of fairness and liability that are generally handled via state law,” said Miller Whitehouse-Levine, policy director at DeFi Education Fund.

After initially approving the CFTC’s method of service through the chatbot, Orrick paused the order in favor of the so-called friend-of-the-court briefs. Now, the CFTC has until Nov. 7 to file a response, with the hearing over alternative service scheduled for the end of November.

The question remains whether any members of the Ooki DAO will come forward to defend themselves. After Fortune contacted several members over Telegram, the DAO declined to comment for this article. There have been internal proposals to direct DAO resources to legal defense. The official on-chain vote launched Monday and likely will end this week: As of publication, the proposal has only received two votes, both affirmative. In the meantime, the DAO geofenced its website in mid-October so users in the U.S. cannot use the platform, although it’s unclear how many prospective users are based in the U.S. 

Despite the impending legal risks, members seem optimistic. In a discussion on Ooki DAO’s Telegram channel a couple of days after the CFTC brought charges, a user with the handle Lex Luthor expressed his support.

“It’s a great honor to push a project like Ooki into the battlefront of the crypto war for liberty,” he wrote. “I wish you guys all the best. We will prevail!” 

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