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Litigation News

Spring 2023, Vol. 48, No. 3

Where Do You Go to Sue a DAO?

John McNichols


  • The CFTC sued Ooki DAO for operating an unregistered cryptocurrency futures trading platform.
  • Ooki DAO is a Decentralized Autonomous Organization (DAO) that operates on a blockchain and has no separate legal personhood.
  • Questions arise regarding the legal status of DAOs, their liability, and the applicability of federal regulations, particularly from the SEC.
Where Do You Go to Sue a DAO?
Jirapong Manustrong via Getty Images

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In September 2022, the Commodity Futures Trading Commission (CFTC) sued something called “Ooki DAO,” alleging that it had set up a trading platform for cryptocurrency futures without federal registration. As the basis of its claim, the CFTC cited Ooki’s software, the virtual trading floor where customers could speculate on the digital coins of their choice. While the CFTC’s claim of jurisdiction over a cryptocurrency trading application was not new, its choice of defendant was: The “DAO” in “Ooki DAO” stands for “Decentralized Autonomous Organization,” a new type of blockchain-based business with no organizational charter beyond its operational software. As a testament to the novelty of its action, the commission sought to effect service of process, not through a registered agent, but simply by posting a copy of the summons to Ooki’s online Chatbox.

While the district court held the commission’s method of service effective—particularly when coupled with personal service on two known participants in the DAO—numerous questions remain concerning the propriety of suing, or otherwise doing business with, a DAO. On one hand, skeptics argue that people having been doing business without a corporate form for a long time and that no special privileges need attach simply because the participants have chosen to do business on a blockchain. Others, however, see DAOs as the perfect vehicle to cultivate next-generation innovation and, to that end, encourage the recognition of a new form of entity. Thus far, only Tennessee, Vermont, and Wyoming have taken steps in that direction, but if current trends continue, others are nearly certain to follow.

What Is a DAO?

The blockchain is the technology that enables cryptocurrency. A form of software, it allows users unknown to each other to undertake verifiable and unerasable transactions over the internet with no physical record whatsoever. The genius of the blockchain lies in its “distributed” nature, meaning that no individual user of the software has the ability to undo or alter the “blocks,” i.e., the timestamped data entries that serve to record individual transactions. Although the blockchain came to fame for its role in cryptocurrency, its ability to provide a decentralized and transparent record of events has potential application to nearly any form of multiparty transaction or decision.

The DAO represents the application of the blockchain in the field of business organization. Unlike corporations and limited liability companies (LLCs), DAOs do not have officers or even any separate corporate existence. They instead merely consist of persons who, by participating in a common blockchain, have agreed to govern their venture through software protocols. Decisions in a DAO are made collectively through the votes of the users, who are known as “tokenholders.” But unlike in a traditional partnership where votes must be counted and then followed by actions taken in furtherance of the group decision, the decision-and-execution process in a DAO occurs automatically, in a single step, simply as a function of the blockchain’s software.

The self-executing character of DAO operations is enabled by the DAO’s “treasury,” a collection of digital assets maintained on its blockchain for disposition according to the DAO’s software protocol. The treasury’s assets are all non-physical, consisting of cryptocurrency and other digital tokens. But notwithstanding the rarified nature of such tokens, assets under the control of DAOs are presently estimated to exceed $9 billion in value, with the largest and most prominent DAOs controlling assets worth more than $100 million each.

What Is the Legal Status of a DAO?

Corporations are artificial persons, dependent entirely on their registration and recognition in a particular jurisdiction for their very existence. DAOs, by contrast, do not depend on legal recognition and are not premised on separate legal personhood. While there is no legal barrier to operating a business without a corporate form, it does come with certain hazards.

The most prominent benefit of corporate personhood is limited liability for the participants in the venture, i.e., the stockholders. Absent a separate corporate form, the law presumes that a multiparty business enterprise is a general partnership, with each participant personally responsible for all liabilities of the venture. This is a point of concern to DAOs, which—because they are not separate legal persons—do not provide a shield against personal liability for individual tokenholders. The lack of separate legal personhood also limits a DAO’s ability to enter into contracts, file lawsuits, or—as may soon be the case for Ooki—hire lawyers to defend against a lawsuit.

A DAO’s lack of entity status raises potentially perplexing questions for lawyers concerning the identity of the client. Such questions are made more difficult by the fact that a DAO’s tokenholders are often anonymous—identified only by the electronic wallet addresses where their tokens reside—and susceptible to change at any time as tokens are traded.

For these reasons, blockchain advocates argue that DAOs should be recognized as separate legal persons in their own right, and a few states have already taken steps in this direction. Vermont, for example, established a new form of business entity, the “blockchain-based limited liability company,” which extends the principle of limited liability to blockchain enterprises, allowing them to write their rules of governance into their operating software without a separate corporate charter. Wyoming and Tennessee, meanwhile, have enacted laws that allow DAOs to be registered as entities with the same legal personhood and limited liability protections of an LLC. Given the availability of these statutory protections, it will be more difficult for DAOs to avoid personal liability for tokenholders in the future if they fail to register in one of these jurisdictions.

What Federal Laws Apply to DAOs?

As the recognition of DAOs at the state level continues to evolve, the question of what, if any, federal regulation applies to them similarly remains in flux. While the CFTC was the agency that filed suit in the Ooki matter, the CFTC’s interest appears to have arisen from the particular activity of Ooki’s platform—i.e., cryptocurrency futures trading—an activity that is not common across DAOs in general. For this reason, commentators have focused on the Securities and Exchange Commission (SEC) as the federal agency most likely to scrutinize DAO activity.

The basis for SEC oversight stems from the fact that the process of creating a DAO frequently resembles a securities offering: Entrepreneurs will offer tokens, coins, or other digital assets in exchange for funding to develop a blockchain network, and members of the public will buy them with the expectation of profit derived from the entrepreneurs’ efforts. As the SEC observed in a 2017 report, an offering of this description meets the test of an investment contract, and the fact that participation in the enterprise is reflected through digital assets rather than “shares” makes no difference to the application of the federal securities laws.

Nevertheless, SEC oversight remains uncertain, for the sound reason that a DAO can evolve over time such that it no longer resembles a business enterprise. Nearly all cryptocurrencies could be described as DAOs in their nascent stages, for example, yet no one would contend that Bitcoin or Ethereum presently has any common purpose beyond serving as a medium of exchange. The test, as SEC Director William Hinman observed in a June 2018 speech, is whether the network on which a digital asset operates is “sufficiently decentralized,” such that purchasers of the asset would not expect its value to inhere in the managerial efforts of a particular person or group. But because this test cannot be reduced to a bright-line standard, the question of whether any particular DAO token is a security subject to SEC oversight “is not static.”