CFTC Fines bZeroX, LLC and Its Founders $250,000 and Charges Its Successor Ooki DAO with Proposed Illegal Off-Exchange Digital Asset Trading, Registration Violations, and Failure to Comply with the Law on bank secrecy

CFTC Fines bZeroX, LLC and Its Founders $250,000 and Charges Its Successor Ooki DAO with Proposed Illegal Off-Exchange Digital Asset Trading, Registration Violations, and Failure to Comply with the Law on bank secrecy

– The Commodity Futures Trading Commission today issued an order concurrently filing and settling the charges against the Respondent bZeroX, LLC (bZeroX) and its founders Tom Bean (Bean) and Kyle Kistner (Kistner) (collectively, the Respondents) for illegally offering leveraged and margined retail commodity transactions on digital assets; engage in activities that only Registered Futures Commission Merchants (FCMs) may engage in; and failure to adopt a customer identification program as part of a Bank Secrecy Act compliance program, as required by the FCM.

Respondents engaged in these activities in connection with a blockchain-based decentralized software protocol that operated similarly to a trading platform. The order requires the respondents to pay a civil penalty of $250,000 and to cease and desist from any further violations of the Commodities Exchange Act (CEA) and CFTC regulations, as charged.

Simultaneously, the CFTC filed a federal civil suit in the U.S. District Court for the Northern District of California, charging the Oki DAO—a decentralized autonomous organization and successor to bZeroX that used the same software protocol as bZeroX—violating the same laws as respondents. The CFTC seeks restitution, disgorgement, civil monetary penalties, trade and registration bans, and injunctions against further violations of CEA and CFTC regulations, as charged.

“Today’s actions demonstrate the CFTC’s commitment to aggressively pursue individuals and their operations that deliberately seek to evade regulatory scrutiny to the detriment of retail customers,” Chairman Rostin Behnam said. “I commend our dedicated enforcement team for continuing with this program which touches on many areas of concern in this growing market.”

“These actions are part of the CFTC’s broader efforts to protect U.S. customers in a rapidly changing decentralized financial environment,” said Acting Enforcement Director Gretchen Lowe. “Trading of digital assets with margin, leverage or financing offered to US retail clients must take place on properly registered and regulated exchanges in compliance with all applicable laws and regulations. These requirements also apply to entities with more traditional business structures as well as DAOs.

Background to the case

The Order finds, and the Complaint alleges, from approximately June 1, 2019 to approximately August 23, 2021, the Respondents designed, deployed, marketed and solicited a blockchain-based software protocol that accepted orders and facilitated sales. margin and leveraged retail. commodity trading (operating similarly to a trading platform). This protocol (the bZx protocol) allowed users to contribute margin (collateral) to open leveraged positions whose ultimate value was determined by the price difference between two digital assets between the time the position was established and when it was closed. The bZx protocol claimed to offer users the ability to engage in these transactions in a decentralized environment, that is, without third-party intermediaries taking custody of users’ assets.

These transactions were illegal because they had to take place in a designated contract market, but did not. Additionally, by soliciting and accepting orders and entering into retail transactions with customers, and accepting money or goods (or extending credit in lieu) to margin such transactions, bZeroX illegally operated as an unregistered FCM. bZeroX also failed to adopt a customer identification program as part of a bank secrecy law compliance program as required by the FCMs. Bean and Kistner, who co-founded, co-owned and controlled bZeroX, were held liable as controlling persons who knowingly caused the underlying violations or failed to act in good faith.

As found in the Order and as alleged in the Complaint, on or about August 23, 2021, bZeroX transferred control of the bZx Protocol to bZx DAO, which subsequently rebranded 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 violate 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 law enforcement proof, allowing the Ooki DAO to violate CEA regulations and the CFTC with impunity, as alleged in the federal lawsuit. The order finds that the DAO was an unincorporated association of which Bean and Kistner were active members and responsible for the Ooki DAO’s violations of CEA and CFTC regulations.

The Law Enforcement Division 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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