Process Service on a Decentralized Autonomous Organization – Fin Tech

Introduction to Decentralized Autonomous Organizations

Web3.0 and the rise of decentralized technologies such as
blockchain, cryptocurrencies and non-fungible tokens raise new and complicated legal issues. As discussed in more detail in our previous message On decentralized governance, smart contracts on a blockchain network like Ethereum, use a form of Decentralized Autonomous Organization (“DAO”) governance. It is an emergent legal structure where there is no central governing body and where members share a common goal of acting in the best interest of the entity. DAO token holders participate in the management and decision-making of an entity, by voting collectively. All votes and activities through the DAO are published on a blockchain which provides public transparency of the actions of its users. Unlike a traditional legal entity that acts through a central authority, in a DAO the collective participants act as the governing body. This article discusses some emerging DAO legal and tax issues and highlights a recent court order that served a DAO with a subpoena.

Emerging questions on the legal and tax status of DAOs

There are emerging and new legal questions about how a DAO may be subject to regulatory or legal action. DAOs do not have legal status in most of the United States and therefore can be considered, by default, a general partnership, with each member potentially having unlimited liability for their actions. Unlike their traditional counterparts, DAOs are only recognized as legal entities in three states: Vermont, Wyoming, and Tennessee. Each of these states allows the DAO to register as a type of LLC.

The lack of legal status in most of the United States is a significant liability risk for DAO participants. Also, since it has no legal status, it is unclear whether a DAO can enter into a contract or conduct traditional business activities. It is also unclear on what basis and how a DAO should be taxed. Should the IRS treat this emerging legal entity, by default, as a partnership? If so, how would Annex K-1 be issued since one of the inherent characteristics of a DAO is the anonymity of token holders? In the absence of a centralized structure, how would each participant receive aggregated information regarding the activities of the DAO (and their share to report on a tax return)? Finally, there are basic litigation issues under federal rules of civil procedure, such as how can a party serve the DAO with a summons, discovery, notices, or motions?

Significance of procedure on a decentralized autonomous organization: CFTC c. Ooki DAO, CA no. 3:22-cv-5416

A federal district court has answered one of these basic legal questions: A DAO can be served with a subpoena. On October 3, 2022, the United States District Court for the Northern District of California seized a order (the “Order”) granting the motion of the United States Commodities Futures Trading Commission (“CFTC”) to serve members of the DAO “Ooki” (formerly d/b/a/bZx DAO) with a summons through of online communications. Specifically, the court granted the CFTC’s motion for alternative service on Ooki DAO and ruled that the CFTC had indeed served Ooki on September 22, 2022, when the CFTC provided a copy of the summons and complaint via the Ooki’s DAO help chat box as well as a contemporary notice. by posting the invitation on the Ooki online forum. The CFTC sued Ooki on September 22, 2022, alleging that the DAO, through its decentralized blockchain-based software protocol, illegally offered leveraged and margined retail commodity trading in digital assets, engaged in to activities that only registered futures commission dealers may perform, and violated the Bank Secrecy Act.

The CFTC lawsuit and order approving alternative service on the DAO through online communications undermines the notion that DAOs are not subject to regulation or legal liability. The CTFCs complaint seeks to impose legal liability on every Ooki DAO token holder who has voted in the Ooki DAO governance process. Note that the CTFC did not prosecute a potentially larger group of actors who could have been defined as any recipient of a token as it would be very difficult to prove that receiving a token (which may happen for a number of reasons) was tantamount to participating in an illegal activity. The CFTC also did not distinguish between token holders who specifically voted to engage in alleged illegal activity and those who did not. The CFTC’s target in the lawsuit is any token holder who voted in the governance process. Legal theory is likely that exercising the right to vote is an indication that the token holder participated in the governance of the DAO and if that governance resulted in illegal activity, that token holder should be held individually responsible for his or her role in the collective DAO governance decision. This is a general standard that can have significant implications for the DAO and its members if applied outside of the regulatory context and instead in the context of traditional litigation.

Ooki DAO has until October 13, 2022 to respond to the complaint, or the CFTC may obtain default judgment against tokenholders who voted in Ooki DAO’s governance process. If that happens, another new legal question that will emerge will be how will the government enforce the judgment on the DAO? If he can determine the identity of the token holders, would he seek to enforce judgment only on US token holders, as they have assets in the United States that may be available to satisfy any judgment or would sue- Does it all token holders whether or not they are US Persons?

The DeFi Education Fund (“DEF”), a Washington, D.C.-based advocacy group that focuses on decentralized finance, and LeXpunK, a collective of lawyers and developers active in the crypto space have filed petitions with the court to obtain permission to file amicus curiae submissions regarding the CFTC’s request for an alternative service. DEF movement can be found here and the movement of LeXpunK can be found here. Both amicus curiaethe briefs argue that the CFTC’s procedural service was inadequate and violates due process. As of the date of this writing, no attorney has filed a notice of appearance on behalf of Ooki DAO.

Implications for Decentralized Autonomous Organizations and Other Decentralized Technologies

The Ooki DAO case may have significant implications for all DAOs. While decentralization can provide many technological benefits, it comes with significant risks as it can introduce unlimited legal liability for any token holder who participates in the DAO governance process. This may be a headwind to the proliferation of Web3, DAOs, and other technologies that rely on decentralization. Additionally, the outcome of the Ooki case may prompt additional state legislation to recognize DAOs as a subset of an LLC to limit the potential liability of token holders who participate in the governance of a DAO.

It is important to note that a different federal district court outside of the Northern District of California may face a similar fact pattern for a different decentralized organization or DAO and may rule differently than the United States District Court for the Northern District of California (because it would not be bound by the Order). The legal and tax implications of DAOs are growing rapidly in areas of law. As this technology becomes more widespread, courts will inevitably have to solve many first impression tax and legal problems. One thing is certain, in the United States District Court for the Northern District of California, members of a DAO may receive a summons through online communications by posting a copy of the summons and complaint in the help chat box and posting it to the DAO. online forum.

Cryptocurrency, Digital Assets and Blockchain Lawyers

have you DAO, Cryptocurrency, Digital Asset or Blockchain Issues or Questions? Freeman Law is an innovative thought leader in the DAO, cryptocurrency, digital asset and blockchain space. DAO, blockchain and virtual currency activities take place in a rapidly changing regulatory landscape. Freeman Law is committed to staying at the forefront as these emerging technologies continue to revolutionize social and economic activities. Contact Freeman Law to schedule a consultation or call (202) 936-3569 to discuss your DAO, cryptocurrency, and blockchain technology issues.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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