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Ooki Amicus Brief; FSOC's Digital Asset Report; Keeping Up with the Kardashians

Ooki Amicus Briefs

What happened?

On September 22nd, the Commodity Futures Trading Commission (CFTC) served Ooki DAO, alleging it is “illegally offering leveraged and margined retail commodity transactions in digital assets” without a Futures Commission Merchant designation or a Bank Secrecy Act (BSA) program.

The CFTC served “Ooki DAO” via a help chat box with a contemporaneous notice posted on a website purportedly affiliated with Ooki DAO. On Monday, the court ruledthe CFTC is legally able to serve “Ooki DAO” in this manner, even though the CFTC plans to hold individuals liable for violations of CFTC’s regulations.

That same day, a community of crypto lawyers and developers, LeXpunK, collectively requested permission to file an amicus brief in the case. They argued that a “fundamental requisite of due process of law” was not met in the CFTC’s notice of Complaint because it did not personally serve the individuals alleged to violate the Commodity Exchange Act (CEA) and did not provide them “with the ability to be heard and respond to claims against them. They further argued that additional steps are required for the individuals CFTC seeks to hold liable to be properly served.

On Tuesday evening, we filed a brief as well. In our brief, we ask the court to reconsider its order on the CFTC’s alternative service and argue that DAOs are not necessarily "associations" of any kind and therefore may not be valid defendants in a CFTC enforcement action.

“First, the Commission has named Ooki DAO as a defendant in this action, asserting that Ooki DAO is an “unincorporated association comprised of Ooki Token holders.” But nothing about the structure of a DAO inherently dictates that result. In many cases, DAOs lack any central organization or management, and many DAO token holders often lack coordination or common objectives. As a result, DAOs will often not be “associations” of any kind, and therefore will not be proper defendants in an enforcement action brought under the Commodity Exchange Act (“CEA”), which requires that a defendant be a “person” (defined to include “associations”). The Commission has not yet alleged facts sufficient to establish that Ooki DAO is an association, so its attempt to serve Ooki DAO here is premature.”

Secondly, we argue that the CFTC’s method of service deprives the individuals CFTC actually plans to hold liable their right to due process and a fair opportunity to litigate issues that affect them.

“Second, the Commission’s Complaint alleges that certain individual Ooki token holders are liable for violations of the CEA. The Complaint does not precisely define which token holders could be held liable. But however the group of alleged violators is defined, the Commission’s proposed method of service does not meet the standards set forth in the Federal Rules of Civil Procedure. If the Commission is permitted to proceed in this action based on its proposed method of service, the Ooki token holders that the action purportedly implicates will not be afforded the due process that the service requirement of Rule 4 provides, nor will they be given a fair opportunity to litigate issues that affect them. Moreover, the Commission and other agencies and litigants may be encouraged to follow this infirm practice in the future, casting doubt on any token holder’s ability to participate in any DAO process without risking individual, joint and several liability.”

Generally, we note that if the CFTC is allowed to proceed “in the manner it has

Proposed,” it “could chill novel and innovative forms of software development in the United States.”

What does this mean?

The CFTC’s process here deprives Ooki DAO token holders—the individuals the CFTC intends to hold liable for alleged violations—a fair opportunity to litigate issues that affect them. It’s unfortunate that major questions about the viability of a new mechanism for human coordination—DAOs—are being asked and could be potentially answered for the first time pursuant to a regulatory enforcement action. That’s even more true given the infirm process CFTC has pursued.

Based on how the judge decides to move forward, this case could go any number of ways from here. We hope others add their views to the record as well given the implications this case could have for Americans’ ability to participate in DAOs.

FSOC’S Report on Digital Asset Financial Stability Risks and Regulation

What happened?

Late Monday afternoon, the Financial Stability Oversight Council (FSOC), an organization established in the wake of the Financial Crisis to promote financial stability, released its Report on Digital Asset Financial Stability Risks and Regulations (Report).

The Report outlined what FSOC views as being the risks and vulnerabilities in the crypto-asset markets in their current form and recommended several regulatory approaches and measures to plug these “regulatory gaps.” The Council seems particularly concerned about the risks associated with the adoption of crypto-assets by the traditional finance sector and how these could potentially affect US financial stability.

For context, FSOC is a council of ten financial regulators from the federal and state level that gather to identify financial stability risks in the US, promote market discipline, and respond to emerging risks to the stability of the United States’ financial system.

With respect to DeFi, the Report highlighted several potential “operational risks” at the protocol level that may need to be addressed, including “the concentration of key services,” and the “vulnerabilities related to the distributed ledger technology.” Specifically, the Report cites data showing the increased adoption of DeFi by institutional investors as a potential risk.

The Council highlighted three regulatory gaps in particular that they feel need to be addressed:

(1) the lack of direct oversight over digital asset spot markets; (2) opportunities for regulatory arbitrage across states and countries; and (3) vertically integrated market structures and the conflicts of interest that come along with them.

What does this mean?

With respect to DeFi, it seems FSOC’s main concern is TradFi adoption and how this interconnectedness will affect financial stability. There’s not much “new” in the report, in other words. They specifically cite “operational vulnerabilities” as a potential “gap” that needs regulation and guidance. But as Bill Hughes noted, it’s important to remember that FSOC is bound by the same procedural and statutory limitations as other financial regulatory agencies.

Keeping Up with the Kardashians

What happened?

On Monday, the Securities and Exchange Commission (SEC) filed a complaint against Kim Kardashian for promoting the EthereumMax token without disclosing the $250,000 payment she received to do so. Kardashian agreed to settle the charges, paying $1.26 million and agreeing to not promote crypto asset security for three years.

The SEC stated, “federal securities laws are clear that any celebrity or other individual who promotes a crypto asset security must disclose the nature, source, and amount of compensation they received in exchange for the promotion.”

In their complaint, the SEC declared the token a security for being “offered and sold as investment contracts,” placing them under SEC jurisdiction under Section 2(a)(1) of the Securities Act. Yet again, however, the SEC did not bring a complaint against the issuer, depriving the issuer of its right to defend itself from the SEC’s allegation.

What does this mean?

It’s no coincidence that the SEC chose arguably the most famous celebrity in the world to make a statement.

More importantly, yet again the SEC has predicated an enforcement action on a conclusory allegation that an asset is a security without giving the issuer an opportunity to dispute the allegation.

This must stop. The SEC’s approach fundamentally undermines people’s right to due process. Regardless of the context, it’s unacceptable for an agency to find individuals effectively guilty of breaking the law without those individuals having any opportunity to defend themselves. Doing so unscrupulously and intentionally circumvents a foundational principle of our system of governance.


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