Court Finds DAO Liable for Operating Illegal Trading Platform

A District Court found a decentralized autonomous organization ("DAO") liable for operating an illegal trading platform and acting as a futures commission merchant without registering with the CFTC.

As previously covered, the CFTC found that the founders of the DAO had created a protocol that provided retail investors - who did not qualify as eligible contract participants and therefore could not enter into swaps - with the ability to enter into leveraged or margined retail commodity transactions that did not result in actual delivery within 28 days. The protocol allowed trading in contracts, the value of which was determined by changes in the price difference between two digital assets.

The founders later transferred control of the protocol to an affiliated DAO in an attempt to "insulate the [protocol] from regulatory oversight and accountability for compliance with U.S. law[,]" with no changes to its operational methodology. The CFTC also charged the DAO with similar violations.

The District Court for the Northern District of California entered a judgment in favor of the CFTC, which imposed against the DAO (i) a permanent injunction to enjoin the DAO from further violating CEA regulations, (ii) a civil monetary penalty of $643,542 and (iii) the removal of the DAO's website and webpages offering its business in the United States.

Statement

CFTC Division of Enforcement Director Ian McGinley called the judgement a "precedent-setting decision" by holding the DAO liable as a "person" under the CEA. He added that the DAO was created "with an evasive purpose, and with the explicit goal of operating an illegal trading platform without legal accountability." He underscored the Court's judgement as a "wake-up call to anyone who believes they can circumvent the law by adopting a DAO structure."