In previous posts, we addressed the interesting service of process issues that were the subject of a number of decisions in the lawsuit that the United States Commodity Futures Trading Commission (CFTC) brought against Ooki DAO (a DAO is a decentralized autonomous organization).  But the case has also received a lot of attention for the larger issues of a proceeding against a decentralized organization and who might be liable for its acts.  The court’s recent decision concerning service of process touched also on some of these other issues.

The complaint alleges that, from approximately June 1, 2019 to approximately August 23, 2021, bZeroX, LLC (bZeroX) designed, deployed, marketed, and made solicitations concerning a blockchain-based software protocol that accepted orders for and facilitated margined and leveraged retail commodity transactions (functioning similarly to a trading platform). This protocol (the bZx Protocol) permitted users to contribute margin (collateral) to open leveraged positions whose ultimate value was determined by the price difference between two digital assets from the time the position was established to the time it was closed. The bZx Protocol purported to offer users the ability to engage in these transactions in a decentralized environment—i.e., without third-party intermediaries taking custody of user assets.

According to the CFTC, these transactions were unlawful because they were required to take place on a designated contract market, but did not. Additionally, by soliciting and accepting orders for and entering into retail commodity transactions with customers, and accepting money or property (or extending credit in lieu thereof) to margin these transactions, bZeroX illegally operated as an unregistered futures commission merchant (FCM).  bZeroX also failed to adopt a customer identification program as part of a Bank Secrecy Act compliance program, as required of FCMs.

The complaint says that, on August 23, 2021, bZeroX transferred control of the bZx Protocol to the bZx DAO, which subsequently renamed itself, and is currently doing business as, the Ooki DAO. The Ooki DAO operates the Ooki Protocol (formerly the bZx Protocol) in the exact same manner as bZeroX and thus is continuing to violate the law in the same manner as bZeroX. By transferring control to a DAO, bZeroX’s founders touted to the bZeroX community members the operations would be enforcement-proof. The complaint says that one of bZeroX, LLC’s founders wrote:

It’s really exciting. We’re going to be really preparing for the new regulatory environment by ensuring bZx is future-proof. So many people across the industry right now are getting legal notices and lawmakers are trying to decide whether they want DeFi companies to register as virtual asset service providers or not – and 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.

The other part of the story was that, on the same day that the CFTC filed the lawsuit, it reached a settlement with bZeroX, LLC and its founders Tom Bean and Kyle Kistner.  They were charged with illegally offering leveraged and margined retail commodity transactions in digital assets; engaging in activities only registered FCMs can perform; and failing to adopt a customer identification program as part of a Bank Secrecy Act compliance program, as required of FCMs.  The respondents engaged in these activities in connection with a decentralized blockchain-based software protocol that functioned similarly to a trading platform.

Thus, in the lawsuit against Ooki Dao, it was essentially being charged with the same violations as the settling respondents.  BZeroX was a centralized organization with two operators (Bean and Kistner) and its business was then transferred to a DAO, with many operators.  One reading of the situation is that, having charged Bean and Kistner, the CFTC could not simply allow Ooki DAO to engage freely in the same conduct.

In the recent motion to dismiss, the movants argued that Ooki DAO could not be sued.  They contended that Ooki DAO is a technology, not an entity or group of persons, and so suing it is akin to suing any other technology, or like trying to hold “the internet” liable.  The court disagreed, at least with respect to the specific facts of this case. 

The CFTC argued that Ooki DAO is an unincorporated association comprised of Token Holders that used (“voted”) their tokens to “govern” the Protocol.  bZeroX LLC had “Administrator Keys” which allowed bZeroX to “access and control” the operation of the smart contracts and the funds held in those smart contracts, including by updating code, pausing or suspending trading, and directing deposits of funds to users. When control of the software transitioned to Ooki DAO, according to the CFTC, control of those Keys transitioned to Token Holders.  Those Token Holders, according to the CFTC, comprise Ooki DAO, and it is their actions and choices taken on behalf of the DAO that the CFTC is seeking to hold liable.

As the court looked at the issue, the CFTC would have been able to sue bZeroX, LLC as an entity for its use of the Keys to control and govern the Protocol. Thus, the CFTC could similarly sue Ooki DAO as an entity for its use of the Keys to control and govern the Protocol.  The court recognized that it was a litigation strategy for the CFTC to sue the organization rather than the Token Holders individually, but that was a decision the CFTC was permitted to make (at least at the preliminary stage of the case).

The movants also argued that Ooki DAO is not subject to suit under the Commodity Exchange Act because it is not a person or unincorporated association and that the CFTC must instead pursue its claims against individuals.  On that issue, the court noted that “the briefs go back and forth between arguing whether an unincorporated association can be sued under the CEA, whether the DAO can be sued under the CEA, whether the DAO is an unincorporated association under the CEA, whether the DAO is an unincorporated association under federal or state law, and whether the DAO can be served as an unincorporated association.”  The court said that all it had to decide on the pending motion was whether Ooki DAO had the capacity to be sued, which it did.  The question of whether the DAO is subject to regulation under the CEA was a separate question at the heart of the merits of this case.  Clearly that issue will be addressed further later in the case.

Finally, the CFTC was suing Ooki DAO as an unincorporated association; movants argued that Ooki DAO is not an unincorporated association and cannot be sued as such.  The court disagreed and said there were several reasons to conclude that the CFTC sufficiently alleged, for purposes of their service of process motion, that Ooki DAO is an unincorporated association under state law.

First, the CFTC showed that Ooki DAO is a “group of two or more persons” because it is comprised of individual Token Holders, who are admittedly persons.  Second, the CFTC sufficiently showed that two or more persons joined Ooki DAO “by mutual consent.” Third, the CFTC sufficiently demonstrated that Ooki DAO has a “common lawful purpose.”  As the court explained: “As outlined in the complaint, Ooki DAO is comprised of Token Holders who own tokens that can be used to vote on certain governance decisions, which may include pausing or suspending trading, making changes to the software protocol, distributing funds from the central Treasury, or choosing to rebrand the DAO. The common purpose is governing the DAO, particularly through the use and distribution of funds from its central Treasury.”  Fourth, the CFTC sufficiently showed, for the purposes of capacity, that Ooki DAO “function[s] under a common name under circumstances where fairness requires the group be recognized as a legal entity.”  For all these reasons, Ooki DAO had the capacity to be sued as an unincorporated association under state law.

This case will undoubtedly continue to receive outsized attention.


David Zaslowsky has a degree in computer science and, before going to Yale Law School, was a computer programmer. His practice focuses on international litigation and arbitration. He has been involved in cases in trial and appellate courts across the United States and before arbitral institutions around the world. Many of David’s cases, including some patent cases, have related to technology. David has been included in Chambers for his expertise in international arbitration. He is the editor of the firm's blockchain blog.