Regulation
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The lawyers explained who should be responsible for the illegal activities that the CFTC accuses the decentralized platform of, and how this will affect holders of governance tokens
The U.S. Commodity Futures Trading Commission (CFTC) has released a statement regarding allegations against the bZeroX crypto project. The platform and its founders were fined for trading digital assets without proper registration and the lack of a client identification program on the platform.
Concurrently, the CFTC filed a lawsuit against Ooki DAO, the decentralized autonomous organization and successor to bZeroX (in 2021, bZeroX transferred control of its protocol to bZx DAO, which was later renamed Ooki DAO), alleging similar violations. The CFTC seeks damages, fines, and a ban on trading and registration.
Decentralized Autonomous Organizations do not have a single decision-making center and are run by a community whose members own governance tokens and participate in voting to make decisions. The CFTC notes that regardless of the form of governance, an organization must be held accountable for illegal activities.
The lawyers told what consequences the lawsuit could have for the holders of Ooki tokens, and who will be held responsible for violating the laws.
“Degree of control”
Basically, the DAOs mentioned in the lawsuit are legal entities that carry out algorithmic trading, says Mikhail Zhuzhzhalov, senior lawyer at Tomashevskaya & Partners. He explained that violations of the laws will be charged to these legal entities as if they were the actions of management or employees.
At the same time, according to the expert, depending on the characteristics of the jurisdiction, the management itself or even the participants may be liable. However, not all token holders will necessarily be counted among the participants, the lawyer explained.
He clarified that this would require the legal entity behind the DAO to issue its shares in the form of tokens. Given the strict regulation of the public circulation of securities, such a situation is unlikely, says Zhuzhzhalov.
The issuer remains responsible for the work of the DAO, and management and beneficiaries may also be held responsible, the lawyer explains. He noted that in the situation with bZeroX and Ooki, the commission just made a claim against the issuer and its founders, who used software for trading, leading to the qualification of their legal entity as a futures dealer.
Moreover, the expert drew attention to the fact that the CFTC requirement just implies the protection of token holders who could not be involved in trading without appropriate permits and compliance with regulations.
The founders, of course, will refer to the fact that they did not actually manage the DAO, since the management capabilities were transferred to token holders, the specialist believes. However, this may not have legal significance, since the capabilities of token holders are set by software that functions at the will of management and founders, the expert believes.
The degree of control, however, could become a subject of dispute in court and tip the scales in favor of the founders, the lawyer admitted. But he also explained that although the DAO can function on its own, this does not mean that the persons who launched it into operation can refer to this as a circumstance that relieves them of responsibility.
In this regard, the actions of the organization will most likely be imputed not to token holders, but to the management itself and the founders, or even only the founders, if the management is nominal, Zhuzhzhalov is sure. He also believes that token holders, if not a small group of controlling persons, will be more likely to be considered victims who have the right to return the money invested in tokens.
“Hypothetical Responsibility”
Yury Brisov, founder of LFCS Legal Support, spoke about the risks of crypto projects that the CFTC in this dispute in the SEC warned about 5 years ago. He explained that the main risk is that the sale of derivative financial instruments and shares requires obtaining special licenses, registrations and other legal requirements.
According to him, many crypto projects fall or may fall under the legal definition of securities and derivatives. However, such projects are usually not properly registered, Brisov added.
He noted that the only specificity of the DAO, unlike other blockchain models, is that all holders of management tokens seem to make a decision, and therefore, hypothetically, they can be held accountable. However, as the courts have already said in similar disputes, the essence of the project is important, the lawyer believes.
He pointed out that the courts will find out which of the token holders could really influence the decision. Therefore, a crypto-investor should not be much afraid, Brisov believes.
“Real promoters and organizers will most likely be held accountable. And ordinary investors, in the worst case, will only face financial losses, which is expected in any case when participating in a project with a high level of risk, ”the lawyer is sure.
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