December 06, 2022
The United States District Court for the Northern District of California (the “Court”) recently held that a decentralized autonomous organization (DAO) could be served via its online forum. If upheld, this decision will have important implications for individuals and financial institutions who hold DAO governance tokens.
On September 22, 2022, the U.S. Commodity Futures Trading Commission (CFTC) served notice to Ooki DAO (“Ooki”), by copying its complaint to Ooki’s Help Chat Box and Online Forum. The complaint alleges that Ooki:
On October 3, 2022, the Court granted the CFTC’s motion for alternative service against Ooki, holding that the CFTC could serve, and already had served, Ooki by providing a copy of the summons and complaint through Ooki’s Help Chat Box, with contemporaneous notice by posting in Ooki’s Online Forum (the “Judgment”).
The CFTC alleged in its motion for service that, by choosing to organize itself as a DAO, Ooki has structured its business in a way that creates significant obstacles to traditional service of process. Ooki has no physical office location, mailing address, is not registered in any jurisdiction and does not have a listed person to accept service.
The CFTC’s suit and proposed method of service rests in part on a claim that Ooki is an unincorporated association, i.e., that it is an entity that can be sued and served. By accepting this novel application of service, the Court has arguably accepted that claim. However, crypto and De-Fi industry groups dispute it.
Since the decision to grant the CFTC’s motion for alternative service, LeXpunK and the DeFi Education Fund have filed amicus briefs in the Court. The filings stipulate concerns relating to the Judgment’s effect on the emerging digital assets sector and, in particular, claim that DAOs are not ordinary business entities. The LeXpunK amicus brief states that:
Both LeXpunK and the DeFi Education Fund assert that the CFTC’s approach to serving a DAO is aimed at obtaining a default judgment because a DAO itself is not an entity that exists and therefore cannot respond to a complaint. If a default judgment is granted, the briefs contend, Ooki Token Holders will be unable to challenge the rules promulgated by the CFTC regarding personal liability. LeXpunK argues that by preventing Ooki Token Holders from challenging these rules, the CFTC is violating basic principles of due process guaranteed under federal and international law.
The Court is set to hold a hearing on December 7 to reconsider its decision to grant the CFTC’s motion to serve Ooki.
Questions of jurisdiction and the legal status of both DAOs and DAO token holders will become more common as such structures propagate. A holding by a court that a DAO is an unincorporated association for purposes of liability could subject DAO token holders to a potential finding that they contributed to the common purpose of the DAO and therefore may be liable for federal regulatory violations. It is not clear that the court will need to definitively rule on that issue in the context of this case, but it is a particularly important issue for financial institutions that custody digital assets and actively engage in the ecosystem. Such institutions should be aware that using their digital assets for governance purposes could potentially expose the voter to claims for liability for the cumulative actions of the DAO. Whether or not such claims have validity would be based on the facts of the case and the laws of the relevant jurisdiction regarding such entities.
If the CFTC’s position is ultimately accepted, crypto advocates argue that a combination of potential unlimited liability for DAO token holders and an inability to challenge CFTC rules will stifle technological innovation and prevent people from interacting with blockchain based software.
This case highlights the uncertainty in the De-Fi industry and should remind individuals and institutions alike to exercise caution when participating in new organizational structures which have not been properly defined under the law.
Special thanks to Avi Shchigel (New York-Finance) and Nick Agostino (Toronto-Derivatives) for their contributions to this publication.