With help from Derek Robertson
The rise of crypto, Web3 and blockchain-driven organizations has raised some weird questions for American regulators in the past couple of years, including this one: How do you bring a legal action against something that’s supposed to be an amorphous digital blob?
We’re in the process of finding out.
A federal court in Northern California has been grappling with that question since the CFTC filed a complaint last month against Ooki DAO, alleging that Ooki had failed to register to engage in regulated commodities transactions and failed to comply with know-your-customer laws.
The problem for regulators: Ooki is a DAO, a decentralized autonomous organization built on the blockchain, owned and run as a kind of collective entity by whoever holds Ooki tokens.
The case appears to represent the first time a federal agency has sued a DAO, which in theory operates without any centralized means of control.
What Ooki actually does is offer users the ability to make leveraged trades on digital assets. Normally, financial trading exchanges are regulated by states and Washington, and the CFTC is arguing that Ooki needs to register as one.
But in attempting to enforce its complaint, the powerful federal agency is raising a host of issues about how exactly to apply existing laws to this novel organizational form.
For starters, there’s the question of how you serve notice to a DAO in the first place.
In this case, because the DAO does not have an identifiable mailing address to receive documents, or an official leader to sign for them, the CFTC sent information about the case to a chatbot on the DAO’s website and posted it on a forum used by DAO members. The Commission argued that this unorthodox process had worked because the forum post had been viewed more than 100 times and been discussed in a group chat about the DAO on the encrypted messaging app Telegram.
On Monday, a judge ruled that the Commission had properly served the DAO, but two outside parties have filed amicus briefs asking the court to reconsider.
While the briefs don’t answer the question of how the government should serve a DAO, the policy director for one of the outside groups, Miller Whitehouse-Levine of the DeFi Education Fund — a 501(c)(4) advocacy group that is itself funded by the Uniswap DAO — pointed me to an intriguing state court precedent.
Earlier this year, a court in New York considered the problem of serving notice to anonymous hackers who had allegedly stolen $8 million of digital assets. The court allowed the plaintiff to serve the defendants by sending a crypto token to the wallet holding the stolen funds that included a hyperlink to the relevant filing.
In Ooki’s case, the relevant wallets would be those that participated in DAO governance votes. “It’s trivial to see which wallets have voted,” Whitehouse-Levine said. “That points to the unreasonableness of not serving individuals.”
Legally serving them papers is just the beginning.
“When it progresses there will be even bigger questions about liability,” said Nicholas Saady, a blockchain-focused attorney at Pryor Cashman. “What is a DAO? Who is liable?”
This isn’t totally uncharted territory. The CFTC has already settled a similar complaint with two founders of the DAO’s predecessor company. And some legal questions related to DAOs can be simplified by holding programmers and founders liable for code they deploy, or by finding that allegedly decentralized groups are actually centralized — as various federal agencies have posited in prior enforcement actions.
More answers could come as soon as next Friday, the current deadline for the DAO to respond to the complaint.
“Who will be filing an answer? Will it just be a default judgment if no one appears? Will it be the original developers?” asked Max Dilendorf, a New York lawyer who specializes in crypto issues. “I don’t know how this will work out in practice.”
NFTs might have taken a hit along with the rest of the crypto market this year, but the abatement of the hype-cycle-slash-gold-rush surrounding them might be a positive thing for the medium’s long-term acceptance.
Case in point: The auction house Christie’s announced last week the launch of “Christie’s 3.0,” a platform that will allow for NFT sales on the Ethereum blockchain. Christie’s 3.0 is currently auctioning a set of nine NFTs from Diana Sinclair, an 18-year-old NFT artist from New York, with the bidding set to end October 11. Christie’s is the rare institution in the old-guard art world to have bear-hugged the medium, having sold a work by the pseudonymous NFT artist “Beeple” for nearly $70 million in early 2021.
In a semi-viral blog post last month, the Web3 venture capitalist Li Jin made the case for blockchain technology as a tool not just for artists to maintain control over their work and livelihood, but to build a community of active “stakeholders” via the tokens they might issue.
If that sounds a little financialized and sterile for the art world — you know, the world of Van Gogh, and Frida Kahlo, and Basquiat — it’s all the more potent a reminder of the strange collision of big VC money and decentralized, insurgent philosophy powering the Web3 movement. — Derek Robertson
Why is Washington freaking out over Elon’s Twitter buy?
POLITICO’s Rebecca Kern has the story today, pointing to the three main reasons politicians and journalists are shaken by the possibility the mogul could take over the platform before the 2022 — not to mention the 2024 — election. Among them:
- Trump’s return to Twitter, which could help “Democrats succeed in framing this as an election about Donald Trump,” as one Republican hand noted.
- Lax moderation, which Democrats and media advocates fear could lead to the spread of false information or hate speech.
- An exodus of politicians, if the aforementioned lax moderation leads to users fleeing the platform and therefore making it less worth those politicians’ time.
When Musk initially announced his plans to purchase the platform in April, we wrote about how although at first glance it might seem like an unusually abstract pursuit for a futurist mostly concerned with (sometimes literally) concrete technology, Twitter’s centrality to public discourse makes its influence as “real” as any lithium battery or humanoid robot. Now that he might own the platform within mere days, that reality is hitting the platform’s power users harder than ever. — Derek Robertson
Stay in touch with the whole team: Ben Schreckinger ([email protected]); Derek Robertson ([email protected]); Steve Heuser ([email protected]); and Benton Ives ([email protected]). Follow us @DigitalFuture on Twitter.
Ben Schreckinger covers tech, finance and politics for POLITICO; he is an investor in cryptocurrency.
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