It’s troubling that the Commodity Futures Trading Commission (CFTC) decided to penalize DAO members simply because they participated in the governance of a DAO.
But this does not mean DAOs and their members have to be in danger.
We’ve been asked a lot about this action because Origami sets up DAOs for organizations whose members demand full protection of their assets and reputations.
Read this full explanation of what happened or skip to our recommendation, below.
The CFTC filed and settled charges against blockchain protocol bZeroX and its founders for
- enabling its users to trade leveraged and margined digital assets without proper permission
- violating the Bank Secrecy Act by not having a program in place to properly identify its customers.
All that is standard for the CFTC. It’s what they do.
Because bZeroX transferred its protocol to Ooki DAO, the CFTC investigated the DAO as well. This makes sense too. If a regulator thinks an entity’s actions violate the law, moving the activity to another entity in the same jurisdiction won’t stop the regulator.
The stunning part is that CFTC pursued members of the DAO for merely voting.
From the case (we added the highlights):
As members of the for-profit Ooki DAO unincorporated association (i.e., as Ooki Token holders who voted their Ooki Tokens to govern the Ooki DAO by, for example, directing the operation of the Ooki Protocol), Bean and Kistner are personally liable for the Ooki DAO’s debts. Accordingly, they are personally liable for the Ooki DAO’s violations of the Act and Regulations set forth in Section III.B.2 supra.12
Why it matters
The CFTC’s stance is that any member of a DAO who voted on the DAO’s governance could be responsible for the DAO’s violations. That could mean a member who votes on a DAO’s logo and nothing else has the same culpability as the DAO’s founders.
This is terrible because DAOs’ strength comes from member participation The DAO movement is here to empower more transparency, ownership, and participation.
Still, this is not a new problem. The business world has had a solution for this for hundreds of years. In business, individuals are shielded from personal liability by operating under legal entities like C Corps and Limited Liability Companies.
Ooki DAO does not appear to have formed such an entity. Footnote 2 of CFTC’s filing says “Ooki DAO is an unincorporated association comprised of Ooki DAO Tokens.” According to West Law, “An unincorporated association is not a legal entity.” (Emphasis ours.) And “an unincorporated association does not have limited liability.”
So Ooki DAO seems to have been no different from a dry cleaner who didn’t form an LLC and therefore had to pay for a slip and fall lawsuit out of his personal bank account.
What your DAO can do to protect itself
First, create a formal legal entity for your DAO. If you listen to our interview with Jules Miler, who enlisted Origami to help her and the Kauffman Fellows set up VC3 DAO, you’ll see how important it was for to protect her members by picking both an appropriate legal entity and jurisdiction.
The right of organizations to limit participants’ liability isn’t new. It was formalized in American law in 1811 and has its origin in 15th century England. It’s the reason J Crew can keep going bankrupt without its CEO and shareholders losing their homes. The Economist magazine said limited liability was “the key to industrial capitalism,” and we believe a limited liability entity is a key to DAO growth.
At Origami, we can automatically make a DAO’s token holders into members of the legal entity you set up.
We can also enable your DAO to indemnify its members if you choose to offer that coverage. Our click-wrap agreement feature can give your members regulatory indemnity the moment they log into your dashboard.
If you chose to do this without Origami, our DAO Toolbox has links for corporate formation.
- A DAO is not a magical shield from regulation. Don’t use it to facilitate the trade of commodities, futures, or other assets without complying with regulations.
- Don’t ignore the Know Your Customer requirements of the Bank Secrecy Act.
- Protect your members the way large Fortune 500 and tiny laundromats protect themselves from liability: with a proper legal entity.