SushiSwap, a decentralized cryptocurrency exchange, has been subpoenaed by the Securities and Exchange Commission (SEC). In response, the company has proposed a legal defense fund to be created by the Sushi DAO, which is the decentralized autonomous organization that governs SushiSwap. The fund will be used to cover the legal costs associated with the SEC’s investigation. This move by SushiSwap highlights the growing regulatory scrutiny on decentralized finance (DeFi) projects and the need for such projects to have legal and regulatory protections in place.
SushiSwap Receives SEC Subpoena, Prepares Legal Defense Fund
SushiSwap, the creator of a popular decentralized exchange running on the Ethereum blockchain, has announced that it has received a subpoena from the US Securities and Exchange Commission (SEC), indicating that it might soon be subjected to regulatory enforcement action. To prepare, the organization has submitted a proposal to the Sushi DAO for the establishment of a legal defense fund to cover potential legal costs. The proposal seeks to make $3 million available for the legal fund in the form of USDT, with a contingency that would make another $1 million worth of USDT available if the initial funds are depleted.
The SEC has been ramping up its enforcement actions against the cryptocurrency industry recently. It has fined cryptocurrency exchange Kraken over its staking product and sued Terraform Labs founder and CEO Do Kwon for alleged securities fraud. The subpoena is just the latest in a string of enforcement actions. However, as of Monday afternoon, the SEC had yet to announce it delivered a subpoena to Sushi or its Head Chef Jared Grey.
Sushi’s SUSHI token fell 5% after the subpoena became public knowledge, dropping from $1.22 to as low as $1.14 in just an hour. It is ranked No. 14 among other decentralized exchanges in terms of daily trading volume.
This isn’t the first time a financial watchdog has gone after a decentralized autonomous organization (DAO) like Sushi DAO. In September 2020, the Commodity Futures Trading Commission (CFTC) filed a lawsuit against Ooki DAO, the organization behind the Ooki Protocol, a decentralized finance platform. This action raised major new legal questions for DeFi founders and DAO members. In December, a California court ruled that the CFTC needs to serve specific individuals in a DAO (in the case of Ooki, the DAO founders), not the DAO as a whole.
It remains to be seen how the SEC’s enforcement action against Sushi will play out. DAO members are debating whether the SEC sent the subpoena directly to Grey to bring an enforcement action against a DAO, given that such groups typically operate without a centralized entity using smart contracts. The members are also discussing removing anyone from the US from Sushi DAO to simplify and reduce the risk of US regulatory scrutiny.