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CFTC levies $250K fine on bZeroX, charges Ooki DAO for regulatory violations

CFTC levies $250K fine on bZeroX, charges Ooki DAO for regulatory violations

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The Commodity Futures Trading Commission (CFTC) fined bZeroX, a blockchain trading protocol, and its two founders $250,000.

At the same time, the CTFC filed a federal civil enforcement action charging Ooki DAO—the successor to bZeroX, which used the same protocol—with illegally offering leveraged and margin trading; does not comply with the Bank Secrecy Act and does not comply with the Commodity Exchange Act.

CFTC Director of Enforcement Gretchen Lowe said the actions were part of the commission’s broader effort to protect U.S. consumers. Lowe said in a statement:

“Trading in margin, leveraged, or funded digital assets offered to US retail customers must occur on properly registered and regulated exchanges in accordance with all applicable laws and regulations. These requirements apply equally to entities with more traditional business structures and DAOs.”

The CFTC found that the bZeroX protocol operated an illegal decentralized trading service between 2019 and 2021. Protokolla and its founders did not register as Futures Commission Merchants (FCM) and did not implement a client identification program.

Tom Bean and Kyle Kistner, the founders of bZeroX, were held liable because the CFTC alleges that they were controlling individuals who knowingly caused the violations.

The $250,000 fine and shutdown order won’t affect the US crypto market, but the ruling against Ooki DAO — which took control of the bZx protocol in 2021 — might.

The CFTC said that the Ooki DAO used the bZx protocol in the same way as bZeroX and that the transfer of control to the DAO did not absolve its founders or members from violating CEA and CFTC rules.

“The order states that the DAO was an unincorporated association whose members Bean and Kistner actively participated in and were responsible for Ooki DAO’s violations of the CEA and CFTC rules,” the CFTC said in the order.

The CFTC defined the Ooki DAO as an “unincorporated association” and said that the individual members of such an organization are liable for their debts under the principles of partnership law.

“Each member of a profit-making association is treated as a shareholder of the association and is jointly liable with other members for the association’s debts,” stated the official judgment.

A lengthy explanation of the Ooki DAO’s structure under partnership law was used to demonstrate why Bean and Kistner were still personally liable, setting a precedent for all future US-based DAOs.

Most DAOs using trading and lending protocols are not organized into regulated structures such as LLCs. This means that its members are not protected from liability if the DAO fails to comply with federal law.

The CFTC defined DAO members as any person holding the DAO’s original token. However, the order said it determined membership of the Ooki DAO by looking at token holders who chose to participate in “business management” by voting.

Summer K. Mersinger, Commissioner of the CFTC, issued a dissenting opinion criticizing the Commission’s approach to the matter.

Mersinger said that determining the liability of DAO token holders based on voting is not based on any statutory authority under the Commodity Exchange Act (CEA) or related case law. He also stated that the approach is blatantly “regulation by enforcement” as it sets policy based on new definitions and standards.

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