Paradigm Files Amicus Brief in CFTC Action Against "Ooki DAO"

October 17, 2022 | Rodrigo Seira

TLDR: Paradigm is filing an amicus brief in the case recently brought by the CFTC against “the Ooki DAO.” While we are not a party to the case, we thought it was necessary to speak up against the CFTC’s attempt to expand liability to unsuspecting technology users and impair the ability of DAOs to operate in the US.

The American court system is built around the concept of fair notice and adversarial argument, ensuring that no one, especially the government, can win by engineering one side’s default. Yet the CFTC’s action against the DAO seems designed to go unopposed and did not provide notice to the persons it seeks to hold accountable. The CFTC is attempting to expand its power by winning a suit against a fictitious defendant that is, unsurprisingly, absent. That is fundamentally unfair.

How did we get here?

The CFTC’s complaint against “the Ooki DAO” was filed simultaneously with the Commission’s announcement that it had reached a settlement with bZeroX LLC and its two founders. In the Commission’s view, the DAO is an “unincorporated association” that took over responsibility for operating and controlling the Ooki Protocol from bZeroX and should therefore be subject to liability. This liability would extend to each of the association’s “members,” meaning that any token holder who voted on a single DAO proposal could be left holding the bag for the entire DAO’s liabilities.

The CFTC’s ill-conceived theory of liability

The CFTC’s attempt to hold any voting token holder liable is fundamentally flawed. It misunderstands the so-called “control” that token holders actually have over DeFi protocols and has no basis in law. It’s also unfair: under the Commission’s reasoning, a token holder who voted against a proposal that would result in violative behavior and subsequently sold their tokens would nonetheless be subject to liability for the actions of “the DAO.” A rubric where trying to prevent liability creates liability is only sound logic in the works of Lewis Carroll.

DAOs are the communities of the future, but the CFTC’s actions threaten their potential

DAOs are a technology for social coordination that could revolutionize the way people organize themselves and enable the communities of the future. Yet, by attempting to hold every token holder who voted in a governance proposal liable for the actions of an imagined legal entity, the CFTC will disrupt DAOs’ ability to coordinate and prevent the technology from reaching its full potential.