The US Commodity and Futures Trading Commission (CFTC) has filed a lawsuit against a decentralized autonomous organization (DAO) protocol, bZeroX, and its founders, Tom Bean and Kyle Kistner, for illegal activities. The Commission also fined the platform $250,000 and ordered it to cease and desist from the industry.
According to the CFTC’s filing on September 22, the DAO platform violated implicit regulations and facilitated leverage between margined retail commodity trading outside the law for a period from June 2019 to August 2021. Notably, it is the first time the CFTC seeks against DAO.
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The allegations include that bZeroX illegally performed activities allowed only to CFTC-licensed traders, and that it margined and leveraged cryptocurrencies outside the legal limit. In addition, the CFTC charged The DAO with failing to comply with the Bank Secrecy Act that requires traders to have a Know-Your-Customer (KYC) rule.
Commission Similarly charges Ooki DAO
OokI DAO, a similar platform and successor to bZeroX, is also facing the same prosecutions from the CFTC for violating the same regulations as its sister company, bZeroX. Now the settlement authority is seeking a complete ban on the defendant platforms’ trading and leverage activities, damages, disgorgement, civil monetary penalties and other remedies.
Understandably, since it is the first lawsuit filed against DAO, it exposes the vulnerabilities of other DAO platforms.
The CFTC expressed its thoughts on this in a statement.
“Trades in digital assets with margining, leverage or financing offered to retail customers in the US must take place on appropriately registered and regulated exchanges in accordance with all applicable laws and regulations. These requirements apply equally to entities with more traditional business structures as well as DAOs.”
The CFTC plans to become a major regulatory body for the crypto industry
In November 2021, bZeroX DAO was attacked which lost nearly $55 million of user funds in DeFi coins and stablecoins. As a result, investors brought a class-action lawsuit against the platform and claimed that it did not maintain security. However, the CFTC is keeping it neutral on the hack in the latter case.
The CFTC’s lawsuit against the first DAO protocol comes a week after the authority participated in two Senate Agriculture Committee hearings to discuss a new regulatory framework that was joined by the SEC’s Gary Gensler. The head of the CFTC, Rostin Behnam, expressed at the time that it is already preparing to become the major regulator and financial watchdog of the crypto ecosystem.
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Interestingly, criticism has immediately surfaced from the DAO community for this move by the CFTC. Miles Jennings, head of decentralization and counsel at prominent venture capital firm Andreessen Horowitz, continued they say;
“It’s that the CFTC is trying to implement the CEA into a protocol and the DAO at all. CEA should be implemented on the frontend and the operators are the ones who facilitated access for US people. Applying compliance burdens to protocols and DAOs is tantamount to holding email creators accountable because criminals can use it to commit crimes.”
Featured image from Pixabay and chart from TradingView.com