The Commodity Futures Trading Commission (CFTC) announced two developments on Thursday, one simultaneously filing and settling charges against bZeroX LLC and its founders Tom Bean and Kyle Kistner, and the other leveling Commodity Exchange Act (CEA) violations at Ooki DAO, a decentralized autonomous organization or DAO and successor to bZeroX.
According to the complaint, from June 2019 to August 2021, bZeroX’s bZx Protocol, a blockchain-based software protocol, accepted orders for and facilitated margined and leveraged retail commodity transactions. “Specifically, it permitted users to contribute margin (collateral) to open leveraged positions whose ultimate value was determined by the price difference between two digital assets from the time the position was established to the time it was closed,” the agency said.
Though the bZx Protocol purported to offer these transactions in a decentralized environment, meaning without third-party intermediaries taking custody of user assets, the transactions were illegal because they were required to take place on a designated contract market, but did not. The complaint also faulted Ooki DAO, which assumed control of the platform from bZeroX in August 2021, for operating as an unregistered futures commission merchants (FCM) and failing to adopt a customer identification program as part of a Bank Secrecy Act compliance program.
The complaint alleged that the company’s founders thought they had the regulatory scheme beat, citing their public statements about having “identified a way to violate the [CEA] and Regulations, as well as other laws, without consequence,” which the CFTC said was wrong.
bZeroX and the individual respondents have been ordered to pay $250,000 in penalties and agree to end the illegal behavior while the complaint against Ooki DAO seeks penalties and trading restrictions.
Commending the actions, Acting Director of Enforcement Gretchen Lowe said they are part of the CFTC’s broader mission “to protect U.S. customers in a rapidly evolving decentralized finance environment.”
However, in a dissenting statement, Commissioner Summer K. Mersinger disagreed with her colleagues, citing the fact that when the 1974-enacted CEA came about, the technology at issue did not exist.
“Unfortunately, I cannot support the Commission’s approach to this particular matter. While I do not condone individuals or entities blatantly violating the CEA or our rules, we cannot arbitrarily decide who is accountable for those violations based on an unsupported legal theory amounting to regulation by enforcement while federal and state policy is developing,” Commissioner Mersinger said.