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CFTC Complaint; Congressional Hearings; Treasury Request for Comment

CFTC Complaint Against Ooki DAO for Violating Commodity Exchange Act

What happened? On Thursday evening, the CFTC settled charges against bZeroX, LLC and its founders, Tom Bean and Kyle Kistner, for “illegally offering leveraged and margined retail commodity transactions in digital assets.” More significantly, the CFTC also filed a complaint against Ooki DAO’s governance token holders who have participated in governance.

"By transferring control to a DAO, bZeroX’s founders touted to bZeroX community members the operations would be enforcement-proof—allowing the Ooki DAO to violate the CEA and CFTC regulations with impunity, as alleged in the federal court action." The CFTC further argued that any governance token holder who has voted is personally liable for the associated smart contract's functionality.

In a dissenting statement, Commissioner Summer K. Mersinger tore into the CFTC’s logic, stating, “While I do not condone individuals or entities blatantly violating the CEA or our rules, 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.”

Mersinger went on to say, “The unmistakable take-away from the Commission’s definitional approach in these enforcement actions is that those in a DAO community should not vote, even if the governance vote encourages following the law…The Commission should not be shrouding its views on these policy issues in obscurity—to be revealed only through enforcement actions... Rather, the Commission should communicate to, and engage with, the public in a transparent manner and seek out the input of those with expertise to share.”

What does this mean? The CFTC’s unprecedented action will discourage any U.S. person from not only developing but also merely participating in DAOs.

How the CFTC’s suit against Ooki DAO plays out will have major implications for all DAOs and participants in DeFi. We stand ready to assist any party willing to fight on issues, like this, that affect the broader DeFi ecosystem.

Please reach out.

Recap of Congressional Hearings Focused on Crypto

Senate Committee on Banking with Chairman Gary Gensler Last Thursday, the Senate Committee on Banking held a hearing with SEC Chair Gary Gensler to discuss several issues, including the Commission’s treatment of digital assets. The Chair’s exchange with Senator Pat Toomey (R-PA) in particular drew attention from the crypto community.

Sen. Toomey expressed his concern with the SEC’s failure to define where the line of “sufficient decentralization” is such that an associated asset does not qualify as a security. “Crypto tokens have varying degrees of decentralization, they usually do not have a financial claim on the issuer, and typically can be settled in real time without intermediaries,” said the top Republican on the panel. “These are very major and important differences from traditional securities and they merit a clearly stated and tailored regulatory framework.”

The Chair responded that “there are many factors” to consider, adding: “It’s not one spectrum of decentralization versus decentralization.” He went on, “I think about a group of individuals in the middle. The developer is in the middle and the investing public is betting on them, counting on them even if the token might be on a thousand computers. That’s not what the Supreme Court’s looking at…. It’s just like a group of developers in the middle.”

Senate Committee on Agriculture with Chairman Rostin Behnam At the same time, the Senate Committee on Agriculture hosted CFTC Chairman Rostin Behnam to discuss the merits of the Digital Commodity Consumer Protection Act (DCCPA).

The bill, proposed by Chair Debbie Stabenow (D-MI) and Ranking Member John Boozman (R-AR), would grant the CFTC with exclusive jurisdiction over “digital commodity” spot markets. Priorly submitted written testimonies emphasized the importance of leaving DeFi out of the bill’s scope; however, concerns are raised about whether this is clearly outlined in the bill.

Much of the hearing focused on the CFTC’s lack of both experience and administrative infrastructure to regulate a spot market with immense retail participation. Chairman Behnam assured the Committee that if the bill were passed tomorrow, the CFTC would have no problem implementing the regime and begin oversight immediately. He also expressed confidence in the CFTC’s ability to garner sufficient funding from the fee provisions in the DCCPA that allow the Commission to collect small fees from exchanges to subsidize the regulatory regime.

Behnam expressed strong support for the bill explaining that “the CFTC’s expertise and experience make it the right regulator for the digital asset commodity market.”

House Committee on Financial Services On Wednesday this week, the House Committee on Financial Services held a hearingto discuss the growth of alternative payment systems and their effects on national security. The hearing hosted a panel of witnesses, including representatives from the blockchain analytics firms Chainalysis and TRM Labs.

While the hearing was focused on payments rails and digital payments in general, crypto was periodically referenced. Head of Regulatory Affairs at TRM Labs, Ari Redbord, expressed his belief that peer-to-peer blockchain transactions will become standard as technology and adoption advance.

Rather than taking a hostile approach to the innovations that may be exploited by illicit actors, Redbord and others on the panel suggested government and law enforcement should work to develop new ways to combat illicit activity.

What does this mean? Chair Genlser didn’t say much that was “new” in his testimony last week, but it was interesting that he refused to concede decentralization is a relevant factor in the SEC’s thinking given that SEC have previously discussed decentralization’s relevance. He also acknowledged in his testimony that certain existing SEC requirements would have to be adjusted to be compatible with the functionality of so-called “crypto security tokens,” which could be a (very) small signal that his position is softening.

The hearing in the Senate Agriculture Committee has more significance for DeFi, especially in light of the CFTC’s complaint against Ooki DAO yesterday. The legislation at issue grants the CFTC jurisdiction over the digital commodity spot markets and creates a mandatory registration regime for “trading facilities,” “brokers,” “dealers,” and “custodians” in those markets. Yet because the bill does not differentiate between centralized businesses and DeFi protocols, it could be interpreted to impose completely unworkable requirements on protocols and/or DAOs (like the requirements the CFTC alleges the Ooki DAO has failed to meet in the futures markets). As it appears the CFTC will not be adopting a nuanced approach to the functional differences between the centralized and decentralized markets, the bill must be clarified.

Treasury Request for Comment

What happened? This past Monday, the Department of the Treasury issued a new request for comment(RFC) on President Biden’s Executive Order (EO) regarding “digital-asset-related illicit finance and national security risks.”

As a quick refresher, the EO directed numerous government departments and agencies, including the Treasury, to develop “a coordinated action plan” to mitigate digital assets’ alleged facilitation of “sophisticated cybercrime-related financial networks and activity.” The Treasury provided its first set of reports to the President on 9/16, issuing their RFC thereafter. Here are some DeFi-relevant questions the Treasury hopes commenters address:

  • "What are the illicit finance risks related to decentralized finance (DeFi) and peer-to-peer payment technologies?"

  • "What existing regulatory obligations in your view are not or no longer fit for purpose as it relates to digital assets? If you believe some are not fit for purpose, what alternative obligations should be imposed to effectively address illicit finance risks...?"

  • "What steps should the U.S. government take to effectively mitigate the illicit finance risks related to DeFi?"

Comments are due 11/3.

What does this mean? We’ll be commenting and encouraging others to as well!


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