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Two natural persons who voted governance tokens issued by a
decentralized finance (DeFi) protocol were charged with being
“personally liable” for alleged violations of the
Commodity Exchange Act (CEA) and regulations of the Commodity
Futures Trading Commission (CFTC) by an autonomous organization
that administered the protocol, in an enforcement action brought by
the CFTC on September 22, 2022.
The CFTC charged bZeroX, LLC (bZeroX) – a Delaware company
founded, co-owned and run by Tom Bean and Kyle Kistner from
approximately June 1, 2019 to August 23, 2021 — with various
violations of the CEA and CFTC regulations for creating and
operating the bZx Protocol. The bZx Protocol constituted a number
of smart (i.e., programmable) contracts operating without
intermediaries on the Ethereum blockchain. The CFTC alleged that
the bZx Protocol illegally offered trading in paired virtual
currencies on a margined or leveraged basis to US-based retail
persons (non-“Eligible Contract Participants”) that did
not result in actual delivery within 28 days – so called
“leveraged or margined retail commodity
transactions.”
Specifically, the CFTC claimed that bZeroX could only have
engaged in leveraged or margined retail commodity transactions on a
CFTC-licensed exchanged (i.e., designated contract market) and did
not; acted as a broker (i.e., futures commission merchant (FCM))
when it solicited transactions and held funds or extended credit to
customers while not registered as an FCM; and did not perform
certain anti-money laundering activity (i.e., know your customer
activity) required of all FCMs.
Mr. Bean and Mr. Kistner were charged with the same violations
as bZeroX for being “controlling persons” of
bZeroX.
bZeroX gave control of the bZx Protocol to bZxDAO on
approximately August 23, 2021. The bZxDAO (later renamed Ooki DAO)
was an autonomous organization that was not a legal entity or owned
or operated by natural persons. Instead Ooki DAO was run through
the exercise of governance tokens (e.g., voting) that were issued
to persons that deposited certain virtual currencies into the bZx
Protocol to facilitate trading on the platform. From August 23,
2021 to the present, Mr. Bean and Mr. Kistner held and exercised
governance tokens on Ooki DAO. The CFTC claimed that Ooki DAO was
liable for the same violations of the CEA and CFTC regulations as
was bZeroX.
The CFTC also alleged that Ooki DAO operated as an
unincorporated association through its members and its members were
persons who received and exercised voting rights in the form of
governance tokens. Because under some states laws, each individual
member of an unincorporated association is jointly liable with
other members for all debts of an unincorporated association, the
CFTC charged that, by analogy, Mr. Bean and Mr. Kistner were
personally liable for all of Ooki DAO’s violations of the CEA
and CFTC regulations. The CFTC cited no authority within the CEA or
CFTC regulations for this extension of liability to Mr. Bean and
Mr. Kistner.
bZeroX, Mr. Bean and Mr. Kistner settled all the CFTC’s
charges against them by agreeing pay a fine of $250,000, among
other sanctions. In doing so, they did not admit or deny any of the
findings or conclusions in the CFTC’s order memorializing the
settlement. The CFTC commenced a separate enforcement action
against Ooki DAO which is pending in a federal court in
California.
Summer Mersinger, a CFTC commissioner, vociferously dissented
from the CFTC’s order. She noted that while she could not
“…condone individuals or entities blatantly violating
the CEA or our rules, we cannot arbitrarily decide who is
accountable for these violations based on an unsupported legal
theory amounting to regulation by enforcement while federal and
state policy is developing.” Ms. Mersinger objected to the
charging of Mr. Bean and Mr. Kistner based on law theories outside
the CEA or CFTC regulations, particularly since she believed there
was a provision under the CEA – prohibiting aiding and
abetting of a violation – that could have been used to hold
the two individuals accountable for the alleged violations of Ooki
DAO.
Order of Settlement:
https://www.cftc.gov/media/7676/enfbzeroxorder092222/download
Pending Action:
https://www.cftc.gov/media/7681/enfookicomplaint092222/download
Dissent of Commissioner Mersinger:
https://www.cftc.gov/PressRoom/SpeechesTestimony/mersingerstatement092222
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