By: Duncan Dobbelman
TL;DR: OokiDAO has put forward a proposal to allocate DAO treasury funds to support a legal defense for its community members.
Ooki is a DeFi protocol that describes itself as “a financial primitive for shorting, leverage, borrowing, and lending that empowers decentralized, efficient, and rent-free blockchain.” Ooki DAO governs the protocol; at the time of writing, the DAO has ~$7.2m in its treasury.
Ooki evolved from bZx protocol, which was created by bZeroX, a limited liability corporation founded by Tom Bean and Kyle Kistner. In August of 2021 the LLC transferred control of the protocol to bZx DAO; both the protocol and the DAO were later renamed Ooki and Ooki DAO, respectively.
On September 22, 2022, the Commodity Futures Trading Commission (CFTC) both filed and settled charges against bZeroX, Bean, and Kistner, requiring them to pay a $250,000 penalty and to “cease and desist” from the actions that caused the violations.
Simultaneously, enforcement action was brought against Ooki DAO, charging the DAO with the same violations, which included “engaging in activities only registered futures commission merchants (FCM) can perform” and “failing to adopt a customer identification program as part of a Bank Secrecy Act compliance program.” (In a novel move, the DAO was served through the chatbot on Ooki’s website as well as through a post in the forums.)
This sent shockwaves through the crypto world, as it is the first time that an entire DAO — and potentially all of its token holders — has been considered liable for regulatory transgressions. While many (if not most) DAOs these days have some kind of legal arm or wrapper that allows them to conduct business with other entities (Ooki DAO did not), many had thought that a decentralized organization would be immune to such legal and regulatory risks. (See our related coverage on SafeDAO.)
In response, Ooki DAO on October 8 put forward a proposal to its community that would — among other things — allocate DAO treasury funds for the legal defense of DAO members and enables geofencing “to prohibit usage of the Ooki frontend for users based in the US.”
Proposal: The Future of Ooki DAO
The forum post floating the proposal at hand, called “Future of Ooki DAO,” asked the community whether the DAO should pursue any or all of four actions:
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“approve allocating Ooki treasury funds to be spent to retain legal counsel to represent Ooki DAO members.”
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“approve allocation of Ooki treasury funds for the DAO to continue operating and any future contingency runway.”
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“approve submitting a legal defense fund grant request on Gitcoin for members of the broader blockchain and DeFi community to support the legal defense of Ooki DAO.”
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“approve releasing an NFT to support Ooki DAO legal defense.”
Governance in Ooki DAO has three stages. First, a description of the proposal is posted in the Ooki forum for community feedback. If consensus on a path forward results from the discussion, the proposal moves to an off-chain, Snapshot vote. Ooki documentation describes a third stage that involves ratification through on-chain voting (though it appears that not all proposals proceed to this stage).
Responses indicated support for pursuing all of the above. When the Snapshot proposal was posted, an additional stipulation appeared that was not discussed in the forum:
“Enabling Geofencing to prohibit usage of the Ooki frontend for users based in the US.”
Clearly, this addition was meant to prevent the kind of violations identified by the CFTC — and to enable the protocol to continue functioning outside of the US (unless and until other regulatory bodies decide to follow in the CFTC’s footsteps).
However, not a single voter participated in the Snapshot — despite the support expressed in the forum discussion — and so the proposal failed. Granted, the Ooki DAO typically commands only a handful of votes for its proposals, usually issuing from less than 10 wallets; still, this was highly unusual given the high stakes both for Ooki and for DeFi in general.
Could it be that members of the Ooki DAO — even its staunchest participants — were hesitant to participate in decentralized governance for fear that it will be construed as a continuing violation by the CFTC? Could there be a liability in voting to defend the DAO from a powerful regulatory body? Some may believe it to be safer to retreat quietly from decentralized governance while they still can.
Despite the lack of any further discussion in the forum, a new, off-chain proposal — with exactly the same title and text — was posted on October 10, the same day the previous proposal failed. This time several DAO members rallied to support, and the proposal passed on October 13 with four wallets voting “yes.” The proposal may soon proceed to an on-chain vote. Ooki.com is already inaccessible to those in the United States.
Why This Is Important
The CFTC actions came as a big surprise, both because regulatory guidance concerning blockchain, crypto, and DAOs has been sorely lacking and because Ooki is a very small protocol, especially when compared to such large and well-known DeFi protocols as Aave and Compound (each of which oversees treasuries many times larger). The worry now is that this action by the CFTC could well set a precedent that makes participants in DAO governance — and even just passive governance token holders — liable for any legal breach, even if a given DAO member was wholly unaware and uninvolved. Should holders of AAVE and COMP and MKR be worried?
The type of “regulation by enforcement” identified by the CFTC’s lone dissenter, Summer Mersinger, is chilling enough to make any DAO participant pause and wonder whether the entire decentralized enterprise — including its many advances and innovations — is doomed to be subject to decades-old regulations that can’t contemplate new forms of participatory governance. To apply a concept from James C. Scott, the State can’t (or won’t) “see” DAOs because they operate outside of State-sanctioned forms — and so partially outside of State control. Or at least so it was thought.
*We’ll be tracking this proposal activity closely at Boardroom, follow our newsletter to stay up to date. If you’re a voter in a protocol, make sure to get on the waitlist for the new Boardroom Portal. *{{Brief03//ooki}}