The CFTC fines bZeroX, LLC and its founders $250,000 and indicts successor Ooki DAO for offering illegal over-the-counter digital asset trading, registry violations and non-compliance with banking secrecy laws

— The Commodity Futures Trading Commission today issued an order simultaneously filing and settling charges against the defendant bZeroX, LLC (bZeroX) and its founders tom bean (bean) and Kyle Kistner (Kistner) (collectively the respondents) for illegally offering leveraged and margin trades in digital assets; Engage in activities that only registered Futures Commission Dealers (FCM) can engage in; and failure to implement a customer identification program as part of a Bank Secrecy Compliance program as required by FCMs.

Respondents conducted these activities in the context of a decentralized blockchain-based software protocol that functioned similarly to a trading platform. The order requires the defendants to pay a civil fine of $250,000 and cease and desist from further violations of the Commodity Exchange Act (CEA) and CFTC rules as charged.

At the same time, the CFTC filed a federal civil enforcement action in the US District Court for the Northern District of California OK DAO– a decentralized autonomous organization and successor to bZeroX that ran the same software protocol as bZeroX – and broke the same laws as the respondents. The CFTC is seeking restitution, disgorgement, civil penalties, trading and registration bans, and injunctions against further violations of the CEA and CFTC rules as charged.

“Today’s actions demonstrate the CFTC’s commitment to aggressively prosecute individuals and their businesses who deliberately seek to evade regulatory oversight at the expense of retail customers,” said Chairman Rostin Behnam. “I commend our dedicated enforcement team for pursuing this program, which touches on many areas of concern regarding this growing market.”

“These actions are part of the CFTC’s broader effort to protect U.S. customers in a rapidly evolving decentralized financial environment,” said Gretchen Lowe, acting director of enforcement. “Margin, leveraged, or funded trading in digital assets offered to retail clients in the United States must be conducted on duly registered and regulated exchanges in accordance with all applicable laws and regulations. These requirements apply equally to companies with more traditional business structures as well as DAOs.”

fall background

The Order finds, and the Complaint alleges, that from approximately June 1, 2019 to approximately August 23, 2021, respondents designed, deployed, marketed and made inquiries regarding a blockchain-based software protocol that received orders for Margin and leverage retail accepted and facilitated commodity transactions (works similar to a trading platform). This protocol (the bZx protocol) allowed users to contribute margin (collateral) to open leveraged positions whose final value was determined by the price difference between two digital assets from the time the position was set up to the time it was closed. The bZx protocol aims to provide users with the ability to conduct these transactions in a decentralized environment – meaning without third-party intermediaries holding users’ assets.

These transactions were unlawful because they needed to take place in a specific contract market, but they didn’t. In addition, bZeroX acted illegally as an unregistered FCM by soliciting and accepting orders for and entering into retail transactions in goods and accepting money or property (or providing credit in lieu) as margin for these transactions. bZeroX has also failed to implement a customer identification program as part of a Bank Secrecy Compliance program as required by FCMs. Bean and Kistner, who co-founded, jointly owned and controlled bZeroX, have been held liable as controllers for knowingly causing the underlying violations or for failing to act in good faith.

As the Resolution states and as alleged in the Complaint, on approximately August 23, 2021, bZeroX transferred control of the bZx Protocol to bZx DAO, which later renamed itself and currently operates as Ooki DAO. The Ooki DAO operates the Ooki protocol (formerly the bZx protocol) in exactly the same way as bZeroX and therefore continues to break the law in the same way as bZeroX. By transferring control to a DAO, the founders of bZeroX announced to members of the bZeroX community that the operations would be enforcement-proof – which would allow the Ooki DAO to violate CEA and CFTC regulations with impunity, as detailed in the lawsuit is alleged in federal court. The resolution states that the DAO was an unincorporated association of which Bean and Kistner were active participating members and were responsible for the Ooki DAO’s violations of CEA and CFTC rules.

The Division of Enforcement personnel responsible for this action are Anthony Biagioli, Lauren Fulks, Yusuf Caper, Thomas Simek, Brittne Snyder, Christopher Reed and Charles Marvine.

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