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(Reuters) – There are three different ways to think of a new amicus brief from famed venture capitalist Andreessen Horowitz in the groundbreaking (and controversial) U.S. Commodity Futures Trading Commission case against the crypto collective Ooki.
At the most basic level, venture capital fund lawyers at Latham & Watkins have pointed out what they say is a technical flaw in the regulator’s plan to notify Ooki token holders of the lawsuit via a chat box and a online discussion forum.
The CFTC, as you may recall, defined Ooki, a so-called Decentralized Autonomous Organization, or DAO, as an unincorporated association. The agency argues that every DAO token holder who participated in a vote on Ooki’s governance is liable for allegedly operating an unregistered derivatives exchange without adequate anti-money laundering protocols.
But since Ooki does not have a registered office, management, or even a registered agent, the CFTC asked U.S. District Judge William Orrick of San Francisco to allow it to serve Ooki token holders by posting notices and documents on the Ooki.com website. California law, the CFTC said, allows this type of alternative service for unincorporated associations.
Andreessen Horowitz’s new amicus brief disputes that claim. The VC fund – which has $35 billion in assets in a large portfolio that includes Facebook, Robinhood and Coinbase – argues that under California law complainants cannot rely on an alternative service to notify associations unincorporated unless their prosecution agrees that the associations serve a lawful purpose. The California law developed in the context of lawsuits seeking injunctions against street gangs, the brief says, but also applies to the CFTC case.
Thus, according to VC’s amicus brief, the CFTC cannot rely on an alternative service because its complaint against the Ooki DAO alleged only illegal conduct. To proceed, Andreessen Horowitz said, the regulator needs to revisit the case to identify the Ooki DAO’s legitimate purpose, and then single out the DAO’s allegedly illegal conduct.
The CFTC declined to comment on Andreessen’s brief. The agency asked Orrick for additional time to respond to the venture capital fund’s arguments.
The alleged technical deficiency is the brief’s most fundamental argument. But it’s worth noting that the VC fund also argues, more broadly, that the CFTC’s struggle to find a way to notify the Ooki DAO reflects deeper issues with the government’s design of the case.
This second dimension of Andreessen Horowitz’s argument mostly echoes previous amicus briefs from crypto groups protesting the CFTC’s assertion that every DAO token holder can be held liable for the collective’s allegedly illegal actions. Andreessen Horowitz and the other Ooki amici said in their briefs that the CFTC should have framed its complaint to assert claims only against DAO members who did something wrong, perhaps naming accused John Doe and seeking to discover their identity.
“Requiring the CFTC to plead a common legitimate purpose of the DAO and take additional steps to identify the members through whom the alleged association may be served — as dictated by California law — is essential to ensuring that the correct defendants are properly served and that there is an opportunity for contradictory testing of the CFTC’s allegations,” the VC fund filing said. (By the way, the Ooki DAO didn’t appear in the case, but his amicus did pay for big-name law firms, including, in addition to Latham, Sullivan & Cromwell, Jones Day and Brown Rudnick. )
The third layer of meaning in the new amicus brief is Andreessen Horowitz’s warning that the CFTC’s assertion of diffuse accountability for DAO members will hamper the innovative use of blockchains and smart contracts. . By promoting community governance, the VC fund said, DAOs offer “the potential to transform online commerce and technology engagement.” But the CFTC’s attempt to blame all DAO members, regardless of their actual conduct, will stifle that potential, the fund said.
Latham declined to comment on the venture fund’s case, but spoke to Ali Dhanani, a partner at Baker Botts – who advises clients on start-ups and DAO membership – about the impact of CFTC’s Ooki case. Dhanani said private equity and venture capital funds were concerned about their exposure as potential DAO members even before the CFTC filed its case. (It’s no coincidence that crypto investment fund Paradigm Operations LP filed an amicus brief for Ooki nor that another web3 fund, Haun Ventures, filed a petition on Monday asking the CFTC to take action. engage in formal regulation to ensure that DAO’s liability is limited to token holders who have engaged in unlawful conduct.)
Dhanani said large investment funds cannot rely on blockchain anonymity if they invest in DAOs because regulators have tools to identify them. Thus, the CFTC’s Ooki lawsuit, Dhanani said, amplified their concerns that they could find themselves charged with all of a DAO’s regulatory misconduct. This fear has deterred many big funds from buying DAO tokens.
“There’s a big stash of money,” Dhanani said, “that won’t go into the DAOs.”
One solution for DAOs seeking capital from big funds, Dhanani said, is to register as LLCs or even DAOs in the handful of states, including Wyoming and New York. Tennessee, which specifically allow DAOs to operate as business entities.
Registered DAOs must follow formal company rules, Dhanani said, so they are subject to state and federal regulations. They must also identify agents who can be served with lawsuits.
This requirement may discourage some DAO founders from registering with state authorities. The CFTC alleges that the founders of Ooki DAO, for example, transferred control of their platform from their limited liability company to the DAO specifically to evade US regulation. The founders eventually reached a $250,000 settlement with the CFTC. But there’s a chance the DAO itself will effectively escape responsibility, especially if the CFTC can’t find a way to serve its case.
Until there is more clarity about which DAO members can be held liable for misconduct – whether through regulation or litigation – DAOs must decide whether the cost of regulation is worth the benefit of additional capital.
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