CFTC fines bZeroX, LLC and its founders $250,000, and also suesi DAO for offering illegal trading in off-exchange digital assets, registration violations, and non-compliance with banking secrecy law

Washington, DC — The Commodity Futures Trading Commission today issued an injunction to file and settle concurrent charges against defendant bZeroX, LLC (bZeroX) and its founders Tom Bean (Bean) and Kyle Kistner (Kistner) (jointly , defendants) for illegally offering marginalized commercial goods transactions in digital assets; participate in activities that only registered futures commission traders (FCM) can engage in; and failure to implement a customer identification program as part of a Bank Secrecy Act compliance program, as required by FCMs.

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

At the same time, the CFTC has filed a federal civil enforcement action in the U.S. District Court for the Northern District of California, accusing the Ooki DAO — a decentralized autonomous organization and successor to bZeroX that used the same software protocol as bZeroX — of violating the same laws as the respondents. The CFTC is seeking restitution, restitution, civil fines, trade and registration bans, and injunctions against further violations of the CEA and CFTC regulations, as charged.

“Today’s actions demonstrate the CFTC’s commitment to aggressively prosecuting individuals and their activities who deliberately attempt to circumvent regulatory oversight at the expense of retail customers,” said Chairman Rostin Behnam. “I commend our dedicated enforcement team for pursuing this plan that touches many areas of focus related to this growing market.”

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

Background to the case

The order finds, and the complaint alleges that, from approximately June 1, 2019 to approximately August 23, 2021, respondents designed, implemented, marketed and requested a blockchain-based software protocol that accepted orders for and facilitated margined and leveraged retail. commodity transactions (which work in the same way as a trading venue). 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 from the time the position was established to the time it was closed . The bZx protocol was intended to allow users to enter into these transactions in a decentralized environment, ie without third-party intermediaries holding user assets in custody.

These transactions were illegal because they were supposed to take place in a designated contract market, but did not. In addition, by soliciting and accepting orders for and entering into commodities transactions with customers, and accepting money or property (or providing credit instead) to margin these transactions, bZeroX was illegally operating as an unregistered FCM . bZeroX has also not adopted a customer identification program as part of a Bank Secrecy Act compliance program, as required by FCMs. Bean and Kistner, who co-founded, co-owned and controlled bZeroX, were held liable as controllers who knowingly caused the underlying violations or acted in bad faith.

As stated in the injunction and as alleged in the complaint, on approximately August 23, 2021, bZeroX transferred control of the bZx protocol to the bZx DAO, which subsequently renamed itself and currently conducts business as the Ooki DAO. The Ooki DAO uses the Ooki protocol (formerly the bZx protocol) in exactly the same way as bZeroX and thus continues to break the law in the same way as bZeroX. By transferring control to a DAO, the founders of bZeroX praised members of the bZeroX community that the operations would be enforcement-proof – allowing the Ooki DAO to violate CEA and CFTC regulations with impunity, as claimed in the federal judicial proceeding. According to the order, the DAO was an unincorporated association of which Bean and Kistner were active members and held liable for the Ooki DAO’s violations of CEA and CFTC regulations.

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

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