Ooki DAO: behind the scenes of a historic decision

A decentralised autonomous organisation (DAO) has just been recognised as a legal entity by a US court. In an interview with The Big Whale, lawyer Victor Charpiat looks back at the consequences of this historic decision.

What is the Ooki DAO case?

In September 2022, the CFTC (the US commodities regulator, editor's note) launched legal action against the Ooki DAO protocol. The protocol, which is still in use, offers various trading, staking and lending/borrowing solutions but, above all, enables leveraged trading in crypto-assets, which is the basis for the CFTC's jurisdiction.

The particularity of this case is that the person being summoned is Ooki DAO, as DAO, and not its founders or the company behind the protocol. The protocol's founders, who initially managed the protocol via the company bZeroX LLC, entered into a separate settlement with the CFTC.

This procedure caused controversy in particular when the judge hearing the case allowed the CFTC to notify the defender, i.e. the DAO, by posting the summons on the Ooki DAO forum and in the site's Help Chat Box.

Ooki DAO having failed to defend itself in these proceedings, a default judgment was finally handed down on 8 June 2023. The judge granted all of the CFTC's requests: to order Ooki DAO to pay a penalty of $643,542, to order Ooki DAO to cease providing a commodities trading solution, and to order Ooki DAO to remove from its website all elements referring to the possibility of trading commodities (or, more simply, to take their website offline).

How is the judgment important for the Web3 ecosystem?

This ruling shows that the substantive arguments around decentralisation and the lack of legal personality for DAOs, and thus their liability, do not convince some judges.

Here, the judge did not hesitate to consider that Ooki DAO was a legal entity within the meaning of US law (in this case a unincorporated association under Californian and federal law, editor's note) and that it was responsible for managing the protocol, on the sole grounds that the DAO theoretically controlled the "administrator keys" relating to the smart contracts.

It is also important in that it does not seek to distinguish between the owners of the governance token, particularly according to their level of participation in governance.

Finally, it asserts the territorial jurisdiction of US courts over a decentralised protocol, on the grounds in particular that the DAO offers its services to US users and that token holders participated in votes while on US territory.

Could the judgment set a precedent at federal level?

It's hard to say. This was a first instance judgment, and what's more, it was a default judgment - in other words, the defendant did not defend himself. If Ooki DAO had engaged in such a proactive legal defence in these proceedings as Ripple, for example, the outcome might have been different.

The judgment will logically be invoked as a precedent by the CFTC, and perhaps the SEC, in future similar cases. But we should expect more sophisticated legal challenges on fundamental questions of law, such as that of the DAO's legal personality, the DAO's effective control of the protocol, and territorial jurisdiction.

Can this be seen as another slap in the face for Web3 in the US?

That would be a bit of an exaggeration. Rulings like this were expected. Serious players have understood for several years that the excuse of decentralisation is not a sufficient legal defence: that is why they have sought to develop their business outside the United States or to restrict access to their platform by US residents.

This still confirms that it is very risky for American people (or people with a marked connection to the United States) to develop DeFi protocols around derivatives on crypto-assets. Alas, similar reasoning could be used by the SEC to prosecute DAOs managing DEXs, therefore active on the spot market and not on the derivatives market.

How are DAOs legally qualified in Europe?

At present, DAOs are in a grey area in France and, probably, throughout the rest of Europe. No country has legislated on the subject, and, to my knowledge, no court has handed down such a clear ruling against a DAO.

On the other hand, it is clear that, depending on national law, there are still legal theories that can be argued to convince a judge that a DAO is a legal person. For example, in France, the theories of de facto company or de facto association could be invoked to seek the liability of the stakeholders in a DAO.

Could we envisage the creation of a separate status for DAOs?

In France, work on the subject is underway within the Haut Comité Juridique de la Place Financière de Paris (HCJP), a public think tank that works on changes to financial regulation.

The possibility of creating a bespoke legal status for DAOs is being discussed, and this approach has notably already been adopted by several US states, as well as the Marshall Islands.

However, the form that such a status would take, at a legal level, remains very unclear and it is likely that such a project would not meet with unanimous approval among legal experts. Nor is there unanimity on the subject among DeFi players: most players in the sector favour, at this stage, recognition of a status for entities that 'represent' DAOs in the legal sphere (e.g. associations under the 1901 law, editor's note) and prefer DAOs, as a concept, to remain outside the field of law.