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`Case 3:22-cv-05416-TSH Document 1 Filed 09/22/22 Page 1 of 25
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`Thomas L. Simek (DC Bar #57268)
`Anthony C. Biagioli (MO Bar # 72434)
`Attorneys for Plaintiff
`COMMODITY FUTURES TRADING COMMISSION
`2600 Grand Boulevard, Suite 210
`Kansas City, MO 64108
`Telephone: (816) 960-7700
`tsimek@cftc.gov
`abiagioli@cftc.gov
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`UNITED STATES DISTRICT COURT
`FOR THE NORTHERN DISTRICT OF CALIFORNIA
`SAN FRANCISCO DIVISION
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`CIVIL ACTION NO: 3:22-cv-5416
`
`
`Hon.____________________
`
`
`COMPLAINT FOR INJUNCTIVE
`AND OTHER EQUITABLE RELIEF
`AND CIVIL MONETARY
`PENALTIES UNDER THE
`COMMODITY EXCHANGE ACT
`AND COMMISSION REGULATIONS
`
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`Commodity Futures Trading Commission,
`
`Plaintiff,
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`v.
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`Ooki DAO (formerly d/b/a bZx DAO), an
`unincorporated association,
`
`Defendant.
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`
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`
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`Plaintiff Commodity Futures Trading Commission (“CFTC” or “Commission”), for its
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`Complaint against Defendant Ooki DAO (“Ooki DAO” or “Defendant”), formerly doing
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`business as the bZx DAO (“bZx DAO”), by and through its attorneys, alleges as follows:
`
`
`
`SUMMARY
`
`1.
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`From approximately June 1, 2019 to approximately August 23, 2021 (the “bZx
`
`Relevant Period”), bZeroX, LLC (“bZeroX”) designed, deployed, marketed, and made
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`solicitations concerning a blockchain-based software protocol (the “bZx Protocol”) that accepted
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`orders for and facilitated margined and leveraged retail commodity transactions (functioning
`- 1 -
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`COMPLAINT
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`Case 3:22-cv-05416-TSH Document 1 Filed 09/22/22 Page 2 of 25
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`similarly to a trading platform). The bZx Protocol permitted users to contribute margin
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`(collateral) to open leveraged positions whose ultimate value was determined by the price
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`difference between two virtual currencies from the time the position was established to the time
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`it was closed. The bZx Protocol purported to offer users the ability to engage in these
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`transactions in a decentralized environment—i.e., without third-party intermediaries taking
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`custody of user assets. In so doing, bZeroX—which had never registered with the
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`Commission—unlawfully engaged in activities that could only lawfully be performed by a
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`registered designated contract market (“DCM”) and other activities that could only lawfully be
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`performed by a registered futures commission merchant (“FCM”) under the Commodity
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`Exchange Act (the “Act”), 7 U.S.C. §§ 1-26, and Commission Regulations (“Regulations”),
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`17 C.F.R. pts. 1-190 (2021). In addition, bZeroX failed to conduct know-your-customer
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`(“KYC”) diligence on its customers as part of a customer identification program (“CIP”), as
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`required of FCMs by the Regulations.1
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`2.
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`On approximately August 23, 2021, bZeroX transferred control of the bZx
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`Protocol to the bZx DAO, a decentralized autonomous organization (“DAO”), which
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`subsequently, on approximately December 18, 2021, renamed itself and is now doing business as
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`the Ooki DAO. The Ooki DAO is an unincorporated association comprised of holders of
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`OokiDAO Tokens (“Ooki Tokens”) who vote those tokens to govern (e.g., to modify, operate,
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`market, and take other actions with respect to) the bZx Protocol (which the Ooki DAO has
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`renamed the “Ooki Protocol”).
`
`
`1
`In an Order filed concurrently with this Complaint, bZeroX and two individuals who
`controlled it (the “bZx Founders”) resolved charges with the Commission in connection with this
`unlawful conduct. See In re bZeroX, LLC, Tom Bean, and Kyle Kistner, CFTC No. 22-31 (Sept.
`22, 2022). Accordingly, this Complaint does not charge or seek relief related to conduct by
`bZeroX and the bZx Founders during the bZx Relevant Period; although, such conduct is
`relevant to this Complaint.
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`COMPLAINT
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`Case 3:22-cv-05416-TSH Document 1 Filed 09/22/22 Page 3 of 25
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`3.
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`A key bZeroX objective in transferring control of the bZx Protocol (now the Ooki
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`Protocol) to the bZx DAO (now the Ooki DAO) was to attempt to render the bZx DAO, by its
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`decentralized nature, enforcement-proof. Put simply, the bZx Founders believed they had
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`identified a way to violate the Act and Regulations, as well as other laws, without consequence.
`
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`A bZx Founder so stated on a call with bZeroX community members prior to transferring control
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`of the bZx Protocol to the bZx DAO:
`
`It’s really exciting. We’re going to be really preparing for the new regulatory
`environment by ensuring bZx is future-proof. So many people across the industry
`right now are getting legal notices and lawmakers are trying to decide whether
`they want DeFi companies to register as virtual asset service providers or not –
`and really what we’re going to do is take all the steps possible to make sure that
`when regulators ask us to comply, that we have nothing we can really do because
`we’ve given it all to the community.
`
`The bZx Founders were wrong, however. DAOs are not immune from enforcement and may not
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`violate the law with impunity.
`
`4.
`
`From approximately August 23, 2021 to the present (the “DAO Relevant
`
`Period”), the Ooki DAO2 has operated, marketed, and made solicitations concerning the Ooki
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`Protocol3 that accepted orders for and facilitated margined and leveraged retail commodity
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`transactions. The Ooki DAO exists for the exact same purpose as bZeroX before it—to run a
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`business, and specifically, to operate and monetize the Ooki Protocol. The Ooki DAO has done
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`so through the votes of Ooki Token holders (or of BZRX Token holders, when the Ooki DAO
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`was doing business as the bZx DAO) who, through their votes, chose to participate in running
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`that business. Just like the bZx Protocol during the bZx Relevant Period, the Ooki Protocol
`
`during the DAO Relevant Period has permitted, and continues to permit, users to contribute
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`
`2
`Herein, “Ooki DAO” refers to the “Ooki DAO, formerly doing business as the bZx DAO
`during the DAO Relevant Period.”
`
` 3
`
`Herein, “Ooki Protocol” refers to the “Ooki Protocol, formerly named and operating as
`
`the bZx Protocol during the DAO Relevant Period.”
`- 3 -
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`COMPLAINT
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`Case 3:22-cv-05416-TSH Document 1 Filed 09/22/22 Page 4 of 25
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`margin (collateral) to open leveraged positions whose value is determined by the price difference
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`between two virtual currencies from the time the position is established to the time it is closed.
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`The Ooki Protocol purports to offer users the ability to engage in these transactions in a
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`decentralized environment—i.e., without third-party intermediaries taking custody of user assets.
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`In so doing, the Ooki DAO—which has never registered with the Commission—is unlawfully
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`engaging in activities that can only lawfully be performed by a registered DCM and other
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`activities that can only lawfully be performed by a registered FCM under the Act and
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`Regulations. In addition, the Ooki DAO does not conduct KYC diligence on its customers (and
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`in fact advertises the lack of KYC requirements as a positive feature of the Ooki Protocol) as part
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`of a CIP, as required of FCMs by the Regulations.
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`5.
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`By virtue of the Ooki DAO’s conduct during the DAO Relevant Period as set
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`forth above and described further herein, the Ooki DAO has engaged, is engaging, or is about to
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`engage in acts and practices in violation of Sections 4(a) and 4d(a)(1) of the Act, 7 U.S.C.
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`§§ 6(a), 6d(a)(1), and Regulation 42.2, 17 C.F.R. § 42.2 (2021).
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`6.
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`Unless restrained and enjoined by this Court, the Ooki DAO will likely continue
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`to engage in acts and practices alleged in this Complaint and similar acts and practices, as
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`described below.
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`7.
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`Accordingly, the Commission brings this action pursuant to Section 6c of the Act,
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`7 U.S.C. § 13a-1, to enjoin Defendant’s unlawful acts and practices, to compel its compliance
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`with the Act and the Regulations promulgated thereunder, and to enjoin it from engaging in any
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`commodity-related activity. In addition, the Commission seeks civil monetary penalties and
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`remedial ancillary relief, including, but not limited to, trading and registration bans, restitution,
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`disgorgement from Defendant, rescission, pre- and post-judgment interest, and such other and
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`further relief as the Court may deem necessary and appropriate.
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`COMPLAINT
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`Case 3:22-cv-05416-TSH Document 1 Filed 09/22/22 Page 5 of 25
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`JURISDICTION AND VENUE
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`8.
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`This Court has jurisdiction over this action under 28 U.S.C. § 1331 (federal
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`question jurisdiction) and 28 U.S.C. § 1345 (district courts have original jurisdiction over civil
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`actions commenced by the United States or by any agency expressly authorized to sue by Act of
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`Congress). Section 6c of the Act, 7 U.S.C. § 13a-1(a), authorizes the CFTC to seek injunctive
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`relief against any person whenever it shall appear to the CFTC that such person has engaged, is
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`engaging, or is about to engage in any act or practice constituting a violation of any provision of
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`the Act or any rule, regulation, or order thereunder.
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`9.
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`Venue lies properly in this Court pursuant to 7 U.S.C. § 13a-1(e) because the
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`Ooki DAO transacted business in this District and certain transactions, acts, practices, and
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`courses of business in violation of the Act occurred, are occurring, or are about to occur in this
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`District, among other places.
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`
`
`PARTIES
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`A.
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`The CFTC
`
`10.
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`Plaintiff Commodity Futures Trading Commission is the independent federal
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`regulatory agency charged by Congress with the administration and enforcement of the
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`Commodity Exchange Act and Regulations promulgated thereunder.
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`B.
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`Defendant
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`11.
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`Defendant Ooki DAO, formerly doing business as the bZx DAO, is an
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`unincorporated association comprised of holders of Ooki Tokens (or of BZRX Tokens, when the
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`Ooki DAO was doing business as the bZx DAO) who have voted those tokens to govern (e.g., to
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`modify, operate, market, and take other actions with respect to) the Ooki Protocol (formerly
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`named the bZx Protocol) during the DAO Relevant Period. The Ooki DAO has never been
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`registered with the Commission in any capacity.
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`Case 3:22-cv-05416-TSH Document 1 Filed 09/22/22 Page 6 of 25
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`
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`A.
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`STATUTORY BACKGROUND AND LEGAL FRAMEWORK
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`To Protect Members of the Public, Retail Commodity Transactions
`Must Be Offered on a Regulated Exchange.
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`12.
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`The purpose of the Act is to “serve the public interests . . . through a system of
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`effective self-regulation of trading facilities, clearing systems, market participants and market
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`professionals under the oversight of the Commission,” as well as “to deter and prevent price
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`manipulation or any other disruptions to market integrity; to ensure the financial integrity of all
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`transactions subject to [the] Act and the avoidance of systemic risk; to protect all market
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`participants from fraudulent or other abusive sales practices and misuses of customer assets; and
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`to promote responsible innovation and fair competition among boards of trade, other markets and
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`market participants.” Section 3 of the Act, 7 U.S.C. § 5.
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`13.
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`Derivatives are financial instruments such as futures, options or swaps that derive
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`their value from something else, like a benchmark or a physical commodity. The Act requires
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`that, subject to certain exemptions, commodity derivative transactions must be conducted on
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`exchanges designated by, or registered with, the CFTC. For example, trading of commodity
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`futures contracts must be conducted on a board of trade designated by the CFTC as a contract
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`market or a registered foreign board of trade. Section 4 of the Act, 7 U.S.C. § 6; Regulation
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`48.3, 17 C.F.R. § 48.3 (2021).
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`14.
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`Retail commodity transactions are transactions that are entered into with, or
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`offered to, non-eligible contract participants4 “on a leveraged or margined basis, or financed by
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`the offeror, the counterparty, or a person acting in concert with the offeror or counterparty on a
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`4
`An eligible contract participant (“ECP”) is, in general, an individual who has amounts
`invested on a discretionary basis, the aggregate of which is in excess of $10 million, or $5
`million if the individual enters into the transaction “in order to manage the risk associated with
`an asset owned or liability incurred, or reasonably likely to be owned or incurred, by the
`individual.” Section 1a(18)(xi) of the Act, 7 U.S.C. § 1a(18)(xi).
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`COMPLAINT
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`Case 3:22-cv-05416-TSH Document 1 Filed 09/22/22 Page 7 of 25
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`similar basis” and which does not result in actual delivery within 28 days. Section 2(c)(2)(D)(i),
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`(ii)(III)(aa) of the Act, 7 U.S.C. § 2(c)(2)(D)(i), (ii)(III)(aa). Retail commodity transactions are
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`subject to 7 U.S.C. § 6(a) “as if” they are a contract of sale of a commodity for future delivery
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`and therefore must be executed on a regulated exchange. 7 U.S.C. § 2(c)(2)(D)(iii).
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`15.
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`A digital asset is anything that can be stored and transmitted electronically and
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`has associated ownership or use rights. Digital assets include virtual currencies, such as bitcoin
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`or ether, which are digital representations of value that function as mediums of exchange, units
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`of account, and/or stores of value. Certain digital assets, including those alleged herein, are
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`“commodities” as defined under Section 1a(9) of the Act, 7 U.S.C. § 1a(9). Accordingly,
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`transactions in digital assets that are otherwise retail commodity transactions under 7 U.S.C. §
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`2(c)(2)(D) must be executed on a regulated exchange. 7 U.S.C. § 2(c)(2)(D)(iii).
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`16.
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`The requirement to execute retail commodity transactions on a regulated
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`exchange is necessary to ensure vital protections for U.S. derivatives markets and market
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`participants. For example, DCMs: (a) must conform to core principles that are designed to
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`prevent market abuse, Section 5(d)(12)(a) of the Act, 7 U.S.C. § 7(d)(12)(a); (b) ensure their
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`financial stability, 7 U.S.C. § 7(d)(21); (c) ensure that the contracts they list for trading are “not
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`readily susceptible to manipulation,” 7 U.S.C. § 7(d)(3); (d)“prevent market disruption,”
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`7 U.S.C. § 7(d)(4); (e) protect their information security, Regulation 38.1051(a)(2), 17 C.F.R.
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`§ 38.1051(a)(2) (2021); (f) safeguard their systems in the event of a disaster, 17 C.F.R.
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`§§ 38.1051(a)(3) (2021); (g) impose position limits designed to reduce the potential threat of
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`market manipulation or congestion, 7 U.S.C. § 7(d)(5); (h) establish and enforce rules to
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`minimize conflicts of interest, 7 U.S.C. § 7(d)(16); and (i) maintain and retain important records
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`and provide them to the Commission, 7 U.S.C. §§ 7(d)(18).
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`COMPLAINT
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`Case 3:22-cv-05416-TSH Document 1 Filed 09/22/22 Page 8 of 25
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`17. When entities offer retail commodity transactions (and other transactions that are
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`required to be executed on a regulated exchange) outside of a regulated exchange, and without
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`adherence to the core principles with which regulated exchanges must comply, they place
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`members of the public at significant risk of harm.
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`B.
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`To Protect Members of the Public, Only Registered FCMs May Solicit
`or Accept Orders for, and Accept Funds to Margin, Retail Commodity
`Transactions.
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`18.
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`An FCM is an individual, association, partnership, corporation, or trust that is:
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`(i) engaged in soliciting or in accepting orders for regulated transactions including futures,
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`swaps, commodity options, or retail commodity transactions, or (ii) acts as a counterparty to
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`retail commodity transactions; and which, in connection with these activities, “accepts any
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`money, securities, or property (or extends credit in lieu thereof) to margin, guarantee, or secure
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`any trades or contracts that result or may result therefrom.” Section la(28)(A) of the Act,
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`7 U.S.C. § la(28)(A).
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`19.
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`FCMs hold customer funds to margin commodity derivative transactions. They
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`are a critical component of the U.S. financial system, and therefore must meet stringent
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`requirements imposed by the Act and Regulations. Among the most fundamental of these
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`requirements is Section 4d(a) of the Act, 7 U.S.C. § 6d(a), which makes it illegal for any person
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`to act as an FCM unless registered as such with the Commission.
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`20.
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`Like the requirement to conduct retail commodity transactions on a regulated
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`exchange, the requirement that only registered FCMs may solicit or accept orders for, and accept
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`funds to margin, retail commodity transactions is necessary to ensure vital protections for United
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`States derivatives markets and market participants. For example, FCMs must segregate customer
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`assets to protect them from the risk of the FCM’s insolvency, 7 U.S.C. § 6d(a)(2); establish
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`safeguards to prevent conflicts of interest, 7 U.S.C. § 6d(c); and employ only salespeople who
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`register with the CFTC and meet strict proficiency requirements, Section 4k(1) of the Act,
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`7 U.S.C. § 6k(1).
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`21. When entities solicit and accept orders for and accept funds to margin retail
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`commodity transactions without registering as an FCM and without adhering to the customer-
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`protection requirements with which FCMs must comply, they place members of the public at
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`significant risk of harm.
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`C.
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`To Prevent Money Laundering and Transactions by Prohibited
`Persons, FCMs Must Adopt CIPs to Verify the Identifies of their
`Customers.
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`22.
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`Regulation 42.2, 17 C.F.R. § 42.2 (2021), requires, among other things, that every
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`FCM shall comply with the applicable provisions of the Bank Secrecy Act (“BSA”) and the
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`regulations promulgated by the Department of the Treasury under that Act at 31 C.F.R.
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`chapter X (2021), and with the requirements of 31 U.S.C. § 5318(l) and the implementing
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`regulation jointly promulgated by the Commission and the Department of the Treasury at
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`31 C.F.R. § 1026.220 (2021), which require that a CIP be adopted as part of the firm’s BSA
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`compliance program.
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`23.
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`31 U.S.C. § 5318(l) requires, among other things, that financial institutions such
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`as FCMs implement reasonable procedures to verify the identity of any person seeking to open
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`an account, maintain records of information used to verify a person’s identity, and consult lists of
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`known or suspected terrorists or terrorist organizations (such as those created and distributed by
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`the Office of Foreign Asset Control of the United States Department of Treasury (“OFAC”)) to
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`determine whether a person seeking to open an account appears on any such list.
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`24.
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`The regulations promulgated by the Department of Treasury under 31 C.F.R.
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`chapter X require, as relevant here, that every FCM must: (1) implement a written CIP that, at a
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`minimum, includes procedures for verifying the identity of each customer sufficient to enable the
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`FCM to form a reasonable belief that it knows the true identity of each customer; (2) retain
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`records collected pursuant to the CIP; and (3) implement procedures for determining whether a
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`customer appears on any list of known or suspected terrorists or terrorist organizations.
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`A.
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`
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`FACTS
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`During the bZx Relevant Period, bZeroX and the bZx Founders
`Designed, Deployed, Operated, Marketed, and Controlled the bZx
`Protocol.
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`25.
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`A blockchain is a distributed, shared, immutable ledger that facilitates the process
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`of recording transactions and tracking digital assets in a consensus-based network. A “smart
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`contract” is a self-enforcing piece of computer code containing all terms of a contract—meaning
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`the software can execute the agreement contained in the contract without additional input from
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`the parties.
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`26.
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`During the bZx Relevant Period, the bZx Protocol was a collection of smart
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`contracts on the Ethereum blockchain that purported to facilitate transactions without
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`intermediaries.
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`27.
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`As set forth above, digital assets include virtual currencies. Ether (“ETH”) is the
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`Ethereum blockchain’s native virtual currency. In addition, Ethereum’s ERC-20 token standard
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`permits the conversion of non-ETH virtual currencies into tokens that can be traded on
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`Ethereum. For example, DAI is an ERC-20 token that can be transacted with on the Ethereum
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`blockchain and whose value is pegged one-to-one to the price of the U.S. dollar.
`
`28.
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`The bZx Protocol enabled any person with an Ethereum wallet to contribute
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`margin (collateral) to open leveraged positions whose ultimate value was determined by the price
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`difference between two digital assets from the time the position was established to the time it
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`was closed. For example, if a trader believed that the price of ETH would rise relative to the
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`price of DAI, the trader might open, for example, a 5x long position in ETH versus DAI (i.e., a
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`COMPLAINT
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`Case 3:22-cv-05416-TSH Document 1 Filed 09/22/22 Page 11 of 25
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`position worth five times the increase in the price of ETH relative to DAI from the time the
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`position was established and the time it was closed). To do so, the trader would proceed as
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`follows:
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`a. The trader would post collateral (e.g., ETH) to a bZx Protocol smart contract as
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`margin to open the leveraged position. (Notably, positions on the bZx Protocol were
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`required to be overcollateralized—i.e., the value of the collateral was required to
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`exceed the value of the borrowed asset. This was to ensure repayment of the
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`borrowed asset. Prior to a trader closing an open position, if the position had lost too
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`much value, the bZx Protocol was designed to facilitate the automatic liquidation of
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`the position and retention and sale of the posted collateral to cover the loss.)
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`b. The smart contract would borrow DAI from a bZx Protocol liquidity pool, whose
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`assets were supplied by liquidity providers who, in exchange, had received interest-
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`generating tokens as well as BZRX Protocol Tokens (“BZRX Tokens”) conferring
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`voting rights on certain matters relevant to bZx Protocol governance. (The BZRX
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`Tokens conferred voting rights in proportion to the holder’s percentage of total
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`BZRX Tokens issued. Additional BZRX Tokens were otherwise minted and
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`allocated to certain individuals.)
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`c. The smart contract would exchange the borrowed DAI for ETH on a separate, on-
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`chain decentralized exchange.
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`d. The smart contract would lock (i.e., prevent from being withdrawn absent conditions
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`expressly written into the smart contract) the newly received ETH and create a token
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`representing the newly established 5x long position.
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`e. The smart contract would send that token to the trader.
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`- 11 -
`COMPLAINT
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`Case 3:22-cv-05416-TSH Document 1 Filed 09/22/22 Page 12 of 25
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`29.
`
`If the trader was correct (i.e., that the price of ETH would rise relative to the price
`
`of DAI), the trader could redeem the token reflecting the position for a profit (i.e., the smart
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`contract would transfer the resulting profit to the trader). If the trader was incorrect (i.e., the
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`price of ETH did not rise relative to the price of DAI), the trader could still redeem the token,
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`except instead of paying profits, the smart contract would retain however much of the collateral
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`was needed to cover the loss.
`
`30.
`
`If the trader wished to open a short position, the trading mechanics would be
`
`similar, except the trader would borrow ETH and swap it into DAI. Traders could open similar
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`positions involving various additional virtual currencies.
`
`31.
`
`The transactions on the bZx Protocol did not involve contracts of sale of digital
`
`assets; rather, they involved leveraged positions whose value was determined by the price
`
`difference between two digital assets. Positions on the bZx Protocol automatically rolled over
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`every 28 days (and could thus exist perpetually) and could be liquidated at any time.
`
`32.
`
`bZeroX, through the bZx Founders, among others, developed a website to market,
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`solicit orders for, and facilitate access to the bZx Protocol. For example, bZeroX’s website
`
`claimed that it offered a superior margin trading experience because “[t]here is no need for any
`
`verification, KYC or AML.” The website further claimed that bZeroX purportedly did not take
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`custody of users’ assets, and there were minimal liquidation penalties. The bZx Founders also
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`made public statements, appeared in interviews, wrote articles, led calls with community
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`members that are publicly available on YouTube, and otherwise publicly marketed and solicited
`
`members of the public to utilize the bZx Protocol. The bZeroX website enabled users, through
`
`the click of a few buttons, to transfer assets and open positions on the bZx Protocol using the
`
`mechanics described above.
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`21
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`- 12 -
`COMPLAINT
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`11
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`13
`14
`15
`16
`17
`18
`19
`20
`21
`22
`23
`24
`25
`26
`27
`28
`
`Case 3:22-cv-05416-TSH Document 1 Filed 09/22/22 Page 13 of 25
`
`33.
`
`bZeroX collected fees from users, including origination fees, trading fees, and a
`
`percentage of interest paid to lenders. bZeroX purports to have collected approximately $50,000
`
`in fees prior to June 2020 and, between June 2020 and August 2021, approximately $500,000 in
`
`fees).5
`
`34.
`
`
`Prior to August 23, 2021 (at which time bZeroX transferred control of the bZx
`
`Protocol to the bZx DAO), bZeroX retained “administrator keys” (“Keys”) permitting bZeroX to
`
`access and control the operation of, and the funds held in, the smart contracts involved in the
`
`above processes. The Keys enabled bZeroX to, for example, update relevant smart contract code
`
`to adjust how the smart contracts operated; pause or suspend trading; pause or suspend
`
`contributions or withdrawals of assets and redemptions of tokens to close positions; and
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`otherwise direct disposition of the funds held in the bZx Protocol smart contracts.
`
`35.
`
`During the bZx Relevant Period, bZeroX did not maintain a CIP and explicitly
`
`advertised the lack of KYC or AML compliance as a positive feature of the bZx Protocol.
`
`bZeroX offered any user anywhere in the world (including in the United States) the ability to
`
`trade on the bZx Protocol and, specifically, did not take any steps to exclude U.S. persons and/or
`
`non-ECPs from the bZx Protocol.
`
`36.
`
`At least twice during the bZx Relevant Period, third parties engaged in
`
`manipulative conduct on the bZx Protocol that resulted in the loss of customer funds. This is
`
`precisely the sort of conduct that compliance with the Commission’s rules and regulations
`
`described above—and adherence to core-principles and regulations such as offering transactions
`
`
`5
`Fees are held in BZRX Tokens or 3CRV (a stablecoin that is redeemable for DAI, USDT,
`or USDC on Curve.Finance). The listed figures reflect approximate conversions to U.S. Dollars
`as of approximately September 14, 2021.
`
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`- 13 -
`COMPLAINT
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`

`

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`
`Case 3:22-cv-05416-TSH Document 1 Filed 09/22/22 Page 14 of 25
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`on a platform not readily susceptible to manipulation and segregating customer funds to
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`minimize risk of loss—is designed to prevent and/or mitigate.
`
`37.
`
`Specifically, on approximately February 14 and 17, 2020, one or more
`
`anonymous users entered into transactions on the bZx Protocol and other platforms that resulted
`
`
`in user(s) allegedly: (1) intentionally defaulting on a bZx Protocol loan which the user had
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`allegedly deliberately undercollateralized by borrowing assets at a price the user had, allegedly,
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`intentionally artificially deflated through arbitrage trades across various platforms; and (2)
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`manipulating pricing “oracles” (i.e., third-party pricing sources on which the bZx Protocol
`
`relied) to improperly profit on transactions on the bZx Protocol. Because bZeroX did not
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`conduct KYC on its customers, bZeroX could not identify the individual(s) who engaged in this
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`conduct. Relevant here, in each case, bZeroX utilized its Keys to pause trading and withdrawals,
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`and to implement fixes to the smart contract code, to address the existing or potential losses to
`
`the bZx Protocol.
`
`B.
`
`During the DAO Relevant Period, the bZx DAO (Eventually Renamed
`the Ooki DAO During the DAO Relevant Period) Controlled and
`Operated the bZx Protocol (Eventually Renamed the Ooki Protocol
`During the DAO Relevant Period).
`
`38.
`
`On approximately August 23, 2021, bZeroX transferred control of the bZx
`
`Protocol (including relevant Keys) to the bZx DAO. From that point forward, the bZx DAO
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`could act with respect to the bZx Protocol only through a vote of BZRX Token holders.
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`39.
`
`The bZx DAO was an unincorporated association comprised of BZRX Token
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`holders who voted those tokens to govern the bZx Protocol.
`
`40.
`
`As set forth in Paragraph 3, the bZx Founders believed that transitioning to a
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`DAO would insulate the bZx Protocol from regulatory oversight and accountability for
`
`compliance with U.S. law.
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`- 14 -
`COMPLAINT
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`Case 3:22-cv-05416-TSH Document 1 Filed 09/22/22 Page 15 of 25
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`41.
`
`In practice, however, the bZx DAO controlled and operated the bZx Protocol just
`
`as bZeroX before it had done. Specifically:
`
`a. The bZx Protocol continued to enable any person with a compatible digital asset
`
`wallet to contribute margin (collateral) to open leveraged positions whose value was
`
`
`determined by the price difference between two digital assets from the time the
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`position was established to the time it was closed, utilizing the mechanics described
`
`in Paragraphs 28-31;
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`b. The bZx DAO continued to market, solicit orders for, and facilitate access to the bZx
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`Protocol, including through individuals acting on the bZx DAO’s behalf (such as the
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`bZx Founders) and the front-end website the bZx DAO now controlled, as described
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`in Paragraph 32;
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`c. The bZx DAO continued to collect the same kinds of fees, including origination
`
`fees, trading fees, and a percentage of interest paid to lenders, that bZeroX had
`
`collected, as described in Paragraph 33;
`
`d. The bZx DAO now controlled the Keys, which enabled the bZx DAO to access and
`
`control the operation of, and the funds held in, the relevant bZx Protocol smart
`
`contracts, as described in Paragraph 34; and
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`e. The bZx DAO, through its front-end website, continued to

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