Legal development

Thought For The Week: Law enforcement against decentralised autonomous organisations - CFTC wins row against Ooki DAO

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    One of the legal headaches generated by the digital assets revolution is the situs for the purposes of legal proceedings of so-called decentralised autonomous organisations or "DAOs". The Courts are now catching up. A California court recently entered default judgment against a DAO which failed to appear because it took the view that it was outside the court's jurisdiction. On 8 June the court upheld the Commodities Futures Trading Exchange's ("CFTC") enforcement action against Ooki DAO in its absence. The decision is likely to have further ramifications on the regulation of decentralised corporate structures in the US and beyond.

    Background

    A DAO is an organisation in which decisions are taken by its members (known as token holders) using blockchain-based voting so that there is no central governing body. DAOs have no headquarters or physical presence and are not registered as any kind of entity in any jurisdiction.

    Summary of the case

    Ooki DAO operated a trading platform which allowed users to invest in and bet on the relative value of digital assets including cryptocurrency tokens. The CFTC's complaint was that Ooki DAO had violated the Commodity Exchange Act ("CEA") by failing to register with it and by failing to observe anti-money laundering procedures. The CFTC alleged that Ooki DAO had adopted the DAO structure in an attempt to avoid being regulated.

    The US regulator argued that Ooki DAO was an "association" within the meaning of the CEA.

    The court accepted the CFTC's argument that it had jurisdiction over the DAO for the following reasons:

    • the trading platform was offered to users in the US;
    • token holders resided in the US and voted whilst in the US; and
    • one of the founders of Ooki DAO advertised the platform on twitter while he was in the US.

    The judge granted default judgment and ordered that Ooki Dao pay a fine of $643,542 and permanently shut down its operations.

    Potential implications of the case

    The verdict is likely to cause some concern in the digital asset community as to whether DAO's will be subject to more regulation going forward. Several cryptocurrency players intervened in the case.

    Actions against DAOs are yet to appear before the English courts. Given the rapid growth of these organisations in recent years it may only be a matter of time before we see the first claim. As DAOs have no obvious domicile it is likely that they will heavily contest the court's jurisdiction and this poses an obvious challenge for both regulators and civil claimants looking for recourse against them.

    It is possible that legislative reform will bring clarity on the legal status of DAOs. In November 2022 the Law Commission published a call for evidence to develop recommendations.

    In the meantime, the courts may follow the approach taken in California by looking for a connection between the DAO and England and Wales. This connection could be through a wide range of factors including the DAO's customers, its decision makers or even its founder's social media. Be careful what you tweet.

     

    The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
    Readers should take legal advice before applying it to specific issues or transactions.