CFTC, DAOs, and Why Regulation by Enforcement is Bad for the U.S.
September 28th, 2022

By Chris Lehane and Tomicah Tillemann

The recently announced Commodity Futures Trading Commission’s (CFTC) enforcement action against Ooki DAO is the latest example of why an "enforcement-only" approach to web3 is bad for the rule of law, bad for the US economy, and bad for national security. It’s also further evidence that the country will need to embrace new laws for new things if we want to lead the world in building the next generation of the internet. To be clear, we don't know all the details of this case or whether there are specific facts that may distinguish the matter from other projects. And we certainly believe innovation needs to be responsible. What we are concerned about is that absent clarity on the rules of the road for this new technology, this enforcement only approach is having an increasingly negative impact on the sentiment of entrepreneurs building in this emerging industry because it is providing no actionable visibility or certainty as to what are the rules.

First, to state the obvious: enforcement actions can play an important role in ensuring accountability and fairness. Many people on our team have served in government, including in enforcement roles. Through this work, we know that the rule of law works best when people have a clear understanding of the rules.  Most individuals want to follow the law and will do so – especially when rules are established through transparent, democratic processes.

The challenge in the United States today is that our existing laws did not contemplate the entirely new universe of technologies embodied in web3. The original legal framework assigning oversight authority over commodity exchanges to what eventually became the CFTC dates back to the Grain Futures Act, enacted 100 years ago this week.

Not surprisingly, laws going back more than a century could not have adequately accounted for the invention of blockchain or what could be built from web3 technology, including a decentralized autonomous organization. Existing laws were written for a different time and do not provide the clarity developers need to be able to follow the law.

However, government agencies have compounded this challenge not only by insisting that existing laws are sufficient, but also by refusing to provide any actionable guidance in response to requests from industry. Enlightened partnership has typically characterized how the public sector and private sector worked together (from the railroads to the auto industry to aerospace to the internet) when old laws are applied to the new technology. The only guidance some agencies are providing is through an “enforcement-only” approach where developers can only learn what the government thinks if the government chooses to act against them.

This “enforcement only” approach is irresponsible in advancing the rule of law; irresponsible when it comes to our national economic interests; and irresponsible in undermining our national security interests.

First, the enforcement-only approach is perversely undermining the rule of law. The U.S. government’s enforcement actions against U.S.-based companies both penalizing those projects and founders who make the affirmative decision to base their operations in the U.S. and rewarding their non-U.S. competitors. Furthermore, by adopting an enforcement-only approach as opposed to an enlightened partnership, the U.S. is pushing this next generation of developers to go off-shore.

Second, in the midst of an ongoing national conversation about why the U.S. does not build big things like the country used to build and how that relates to the nation’s long-term economic interests, it needs to be understood (and many from across the political spectrum have made a similar point across a range of economic sectors) that a major contributing factor to this national malaise in building is a that we have government that is overly-optimized to find ways to say “no” through enforcement as opposed to an enlightened government seeking to partner with those builders seeking to be responsible to advance new ideas that will serve the common good.

Nowhere do we see this attitude pervade more than in web3. The CFTC’s action against a DAO speaks to the perils of such an enforcement only approach. A DAO represents a unique opportunity to leverage the underlying technology of web3 to build a new form of decision-making into the actual governance structure of an economic enterprise in ways that could represent the single biggest step forward to those interested in stakeholder capitalism. Rather than an enforcement action that could chill this innovation in governance, why not seek to work with it?

And, third, this enforcement only approach will almost by definition risk the country’s national security. The infrastructure of the internet is going to change. That change is going to take place amidst the global fight between democracies and autocracies.  If the U.S. does not lead in supporting the developers for this next generation of the internet it is going to cede its ability to shape what the future of the internet looks like – and by extension what the world order looks like.

As we write, there is legislation with significant bi-partisan support that has been put forth coming out of the Senate Agriculture Committee to give the CFTC more authority to regulate digital assets. The legislation needs to be improved, including defining more clearly what kind of digital assets should be a commodity bringing DeFi protocols within the regulatory purview of the agency.  However, the mindset behind the legislation represents an understanding that new rules are needed for a new thing and reflects a seriousness of purpose from leaders in Congress to engage web3 with an enlightened approach. The enforcement actions of various federal agencies make clear what is at stake and why it is critical for the U.S. to shift from an enforcement-only to an enlightened approach.

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