Regulatory authorities continue their crackdown on the crypto market. On Thursday, the Commodity Futures Trading Commission (CFTC) announced settled charges against founders of the bZx protocol.
The CFTC has imposed fines of $250,000 on the founders of bZeroX, Kyle Kistner and Tom Bean, for not adopting requirements for customer identification called KYC and for offering margined and leveraged retail commodity transactions illegally in digital assets.
But, the most notable move of the CFTC was that it also sued an associated DAO.
According to the regulatory authority, the Ooki DAO that was founded by Kistner and Bean for decentralizing the control of the bZx protocol had also broken the same laws.
It should be noted that the two founders neither denied, nor admitted to the charges filed against them, or bZeroX, but they settled them.
As far as the DAO is concerned, the CFTC is looking to impose penalties on it, which include fines, disgorgement and potential registration and trading bans.
The CFTC said that Kistner and Bean had been active members of the DAO, which means that they are also liable for the violations made by the unincorporated association of the CFTS regulation and Commodity Exchange Act.
Liability of founders
In a rather unprecedented move, the Commission said that the two founders are liable for the illegal behavior of the DAO because they were holding Ooki tokens.
In addition, the two were also voting on governance proposals for determining the operation of the DAO.
Summer Mersinger, the Commissioner of the CFTC said in a statement that this action was taken for ensuring regulation via enforcement.
It also does not depend on the legal authority of the mandate of the CFTC. Mersinger said that there were several reasons for not agreeing with the approach of the Commission in terms of determining liability.
The liability of token holders of the DAO could not be determined simply because of their participation in governance voting.
It should be noted that the CFTC used the term unincorporated association for defining the Ooki DAO and the way it determined the liability of the founders could have a lot of implications.
It would have an impact on other DAOs as well as the world of decentralized finance (DeFi). Gabriel Shapiro, the General Counsel for Delphi Labs said that certain DAOs were already feeling the effect.
There were already a number of DAO delegates who were talking about stepping down from their roles. He said that DeFi founders facing regulatory action do not necessarily have to settle.
He added that there were other options that they could explore. As for the DeFi Education Fund, it referred to the CFTC’s lawsuit against the DAO as unprecedented action that aims to use enforcement.
Blockchain Association’s head of policy, Jake Chervinsky also said that the enforcement action taken by CFTC against bZx was the most egregious example of such regulation in the crypto space.
The crypto industry is becoming increasingly worried that the approach of the CFTC could also be applied to other DAOs and their members.