Case Study: "DAO Legal Wrangling – Lessons from Ooki DAO and Others"

Overview: Decentralized Autonomous Organizations (DAOs) were supposed to be a revolutionary way to govern blockchain-based projects—self-executing, community-driven, and free from traditional corporate structures. But recent legal actions, including the case against Ooki DAO, have raised pressing questions: Are DAOs really decentralized? Who is responsible when things go wrong? And can these organizations operate without a legal framework?

 Introduction: The DAO Dream vs. Reality

• DAOs were envisioned as a solution to centralized control, giving power to token holders in a democratic, transparent way.

• However, real-world applications have exposed legal vulnerabilities—lack of accountability, regulatory uncertainty, and governance challenges.

• The case of Ooki DAO has set a precedent, making it clear that regulators are ready to crack down on DAOs that don’t comply with existing laws.

The Ooki DAO Case: What Happened and Why It Matters

The Ooki DAO case was a landmark legal battle that challenged the idea that DAOs (Decentralized Autonomous Organizations) could operate outside of traditional regulatory frameworks. The case revolved around whether DAO members who participate in governance votes could be held legally responsible for the DAO’s activities—a ruling that has profound implications for decentralized governance.

What Was Ooki DAO?

Ooki DAO was a decentralized trading platform that allowed users to engage in margin trading and leveraged trading on Ethereum. Originally launched as bZeroX by two founders, the project was later transitioned into a DAO structure, meaning control of the platform was passed to a decentralized group of governance token holders rather than a central company.

Key Features of Ooki DAO:

• Operated a non-custodial trading protocol, meaning users controlled their funds rather than relying on an intermediary.

• Allowed users to trade with leverage and margin, making it a decentralized alternative to traditional derivatives trading platforms.

• Shifted governance from a centralized company (bZeroX) to a DAO structure, with token holders voting on protocol decisions.

What Was the CFTC’s Case Against Ooki DAO?

In September 2022, the Commodity Futures Trading Commission (CFTC) filed a lawsuit against Ooki DAO, accusing it of operating an unregistered trading platform and failing to comply with anti-money laundering (AML) regulations.

The CFTC’s Core Arguments:

1. Ooki DAO was offering financial products (leveraged and margin trading) without proper registration.

   • The CFTC argued that these activities required registration under U.S. financial laws, just like any traditional financial derivatives platform.

   • By avoiding registration, Ooki DAO was violating the Commodity Exchange Act (CEA).

2. Ooki DAO tried to avoid legal responsibility by decentralizing governance—but that didn’t change its legal obligations.

   • The CFTC asserted that just because a project is a DAO doesn’t mean it’s exempt from the law.

   • If a company had to follow financial regulations before becoming a DAO, those regulations don’t disappear just because governance is handed over to token holders.

3. Anyone who participated in Ooki DAO governance votes could be held legally responsible for its actions.

   • This was the most controversial part of the case.

   • The CFTC’s stance was that voting on DAO governance proposals made token holders legally liable for violations of U.S. financial laws.

What Were the Opposing Arguments?

Ooki DAO members and Web3 advocates strongly disagreed with the CFTC’s approach, arguing that:

1. DAOs Should Be Treated Differently from Traditional Organizations

• DAO supporters claimed that a DAO is not the same as a traditional company—it is a decentralized collective, and no single individual or group has centralized control.

• If the law treats DAOs like corporations, then who exactly is "in charge"? If no central entity controls the protocol, how can a regulator hold individual participants accountable?

2. Voting on a DAO Shouldn’t Mean Legal Liability

• The CFTC’s claim that voting in a DAO makes token holders legally responsible was widely criticized.

• Critics argued that voting on a governance proposal is not the same as running a company.

• By this logic, if someone votes in a DAO governance poll and the DAO later violates regulations, that voter could be held legally responsible—even if they didn’t personally profit or directly participate in illegal activity.

3. The CFTC’s Approach Could Kill DAO Governance

• If DAO voters could be personally sued, many people would simply stop participating in governance altogether.

• This could cripple decentralized governance, undermining one of the key innovations of Web3.

What Was the Outcome of the Case?

Ooki DAO did not mount a legal defense, leading to a default judgment in June 2023. The federal court ruled in favor of the CFTC, setting a precedent that DAOs are not immune from U.S. regulations.

Key Takeaways from the Ruling:

✔️ DAOs Can Be Held Accountable Just Like Traditional Companies.

• The court ruled that Ooki DAO functioned like an unregistered financial service provider and was required to follow U.S. financial laws.

✔️ DAO Governance Token Holders Can Be Liable.

• Because DAO members voted on governance proposals, they were held responsible for the DAO’s actions.

✔️ Regulators Can Sue DAOs as Legal Entities.

• The ruling set a precedent that U.S. regulators can take legal action against DAOs just as they would against a company—even if there’s no single CEO or leadership team.

What Was the Impact of the Ooki DAO Case?

The Ooki DAO case was a wake-up call for the Web3 industry. Its outcome forced projects to rethink whether DAOs can truly be decentralized while still complying with legal requirements.

1. More DAOs Are Registering as Legal Entities

• Many DAOs have started forming LLCs, foundations, or other legal structures to shield their members from legal liability.

• For example, MakerDAO and Aave have explored using legal wrappers that protect participants while maintaining decentralization.

2. DAO Voter Participation Has Declined

• The case scared off many people from actively voting in DAOs, fearing they could be held responsible for decisions made by the broader group.

• Some DAOs are exploring anonymous or multi-layered governance models to reduce individual risk.

3. The U.S. Could See More Legal Action Against DAOs

• The CFTC has now established a precedent that DAOs are subject to U.S. financial regulations.

• This could lead to more lawsuits against DAOs, especially those offering financial products like lending, margin trading, or derivatives.

4. The Trump Administration’s Stance on DAOs Remains Unclear

• The Biden-era CFTC aggressively pursued this case, but it’s uncertain whether the Trump administration will continue this level of enforcement.

• Trump’s policies generally lean toward deregulation, but whether that extends to DAOs remains to be seen.

Conclusion: The Beginning of DAO Regulation

The Ooki DAO case has fundamentally changed how regulators view DAOs. Gone are the days when DAOs could claim to exist "outside the system." If a DAO offers financial services, regulators now have a roadmap to take action.

This leaves Web3 projects with a difficult choice:
1. Comply with regulations by adopting legal structures.
2. Stay fully decentralized but risk legal action.

As more DAOs emerge and regulators become increasingly aggressive, the Web3 community must grapple with a crucial question: Can DAOs remain decentralized while still following the law? The answer will shape the future of decentralized governance.

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Other Articles In This Issue:

• The Future of Web3 Regulation: Clarity of Chaos?

• The Editorial: Can Web3 Thrive Without Overregulation?

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