Ooki DAO Update; JP Morgan: The Crypto Ecosystem Post FTX; WSJ: Centralization Caused the FTX Fiasco
DEF Weekly Roundup - 11/30
Ooki DAO Update
We have filed our response to the Commodity Futures Trading Commission's (CFTC) filing from last week concerning their motion for alternative service.
We argue that the CFTC has failed to “demonstrate both that its method of service was reasonably calculated to reach those specific voting token holders and that Ooki DAO is actually an unincorporated association that can accept service.”
We ask the Court to reject the CFTC’s “attempt to retreat from the flawed theory on which it charged this case.” With that said, the CFTC has not provided evidence that their proposed method of service was direct enough to satisfy federal notice requirements.
We also argue that Ooki DAO is not an unincorporated association and ask the Court to reject the CFTC’s request to defer judgment on the matter. An unincorporated association must be “a voluntary group of persons formed by mutual consent for the purpose of promoting a common objective.”
Ooki DAO meets neither requirement because a person voting on the same platform as another does not automatically constitute mutual consent to associate with each other and “nothing about owning and voting a token on its own evinces a common pursuit with other token holders.”
Lastly, we argue that the CFTC’s unprecedented theory is harmful and unnecessary. The CFTC’s expansive view in its unincorporated association theory sets harmful precedent that undermines existing limitations on the Commodity Exchange Act established by Congress.
Furthermore, it deters DAO participation and, therefore, innovation.
We will be presenting the merits of our arguments in front of Judge Orrick on December 7th.
JP Morgan: The Crypto Ecosystem Post FTX
Last Thursday, JP Morgan published their Global Markets Strategy, predicting an increase in regulatory pressure on the crypto ecosystem following the collapse of FTX.
The report argues that existing initiatives will likely be brought forward such as the European Union’s Markets in Crypto Assets (MiCA), which remains in the final approval stage after a decision to delay the vote.
Due to recent events, the report predicts that the final approval will happen before the end of the year and the transitional period to implement the regulation will likely be reduced from 18 months.
Regarding US regulation, the report acknowledges the “fragmentation and disagreements among US regulators” and describes the existing regulatory initiatives in Congress as inconsistent with each other. The report predicts a greater sense of urgency from Congress moving forward.
The report also acknowledges the debate of whether cryptocurrencies should be classified as securities or commodities in the U.S. It predicts that classifications are to come, particularly that Bitcoin will be classified as a commodity and a vast majority of the remaining cryptocurrencies as securities.
Other predictions in the report suggest “unbundling of broker/trading/lending/clearing/custody” and mandating reporting/auditing of reserves, assets, and liabilities for CeFi.
Unfortunately, the report expresses skepticism toward DEXs. It argues that smart contracts will “face greater scrutiny” from regulatory initiatives aimed at unbundling and that DEXs are insufficient in granting larger orders due to slow transaction speed and traceability on the blockchain.
It goes on to suggest that DeFi protocols “rely heavily on centralized exchanges” to function and parts of its infrastructure, such as smart contracts and governance, are risky.
What does this mean?
Overall, the report highlights one of the broader practical implications many have pointed to following the collapse of Terra and FTX – regulations are coming.
However, despite this reality, its forecast on the future of DeFi regulations is premature. While the collapse of FTX has certainly increased the possibility of having to fight misguided legislation, we are confident this will be recognized for what it actually was – off-shore fraud enabled by a lack of regulatory clarity.
Accordingly, U.S. policymakers will likely begin their efforts by hashing out the regulatory battle between the SEC and CFTC that the report pointed out. While answering this question does implicate DeFi (i.e., what constitutes a digital security and/or digital commodity?), it by no means qualifies the claim that DeFi protocols rely on any centralized infrastructure like exchanges.
We will continue to stress these important distinctions in our conversations with policymakers.
WSJ: Centralization Caused the FTX Fiasco
Over the weekend, TheWall Street Journal published an op-ed by Vivek Ramaswamy, Cofounder and Executive Chairman of Strive Asset Management, and Mark Lurie, CEO of Shipyard Software, in which they explain how centralization enabled the FTX debacle and how DeFi differs.
Ramaswamy and Lurie emphasize that trading on a centralized exchange requires third party custody of user assets, and although regulation exists in traditional finance, it would have been “equally possible” for a custodian to “misappropriate funds” as it was for a centralized crypto exchange.
Furthermore, they argue that unbundling custody, brokerage, and exchange operations (as suggested by JP Morgan above) is already required of traditional finance and did not prevent the non-crypto MF Global scandal.
DeFi, however, enables self-custody and transparency through blockchain technology and open-source code. For this reason, they argue, DeFi should not fall under the same regulatory framework as its centralized counterparts as it has the potential to prevent fraudulent behavior in the future.
What does this mean?
Ramaswamy and Lurie recognize how centralized infrastructure opens the opportunity for malicious behavior and that existing regulations are not adequately preventing it either. However, neither FTX nor traditional financial institutions could have pulled off this scheme had users held their own assets and had they been publicly auditable.
While still evolving, DeFi presents an attractive alternative to the shortcomings of traditional finance and its mirror image in crypto. For that reason, Congress must not interfere with DeFi’s innovation and instead focus on regulating the problem at hand: centralized custodians.