A class-action lawsuit has been filed against Bancor decentralized autonomous organization (DAO), its operator BProtocol Foundation, and its founders in the U.S. District Court for the Western District of Texas. The plaintiffs accuse Bancor of deceiving investors regarding its impermanent loss protection (ILP) mechanism for liquidity providers and allege that it operated as an unregistered security.
The lawsuit claims that Bancor’s v2.1 investment product, introduced in October 2020 as the second iteration with ILP, operated at a deficit that the defendants were aware of. To mitigate the situation, they launched a new product, v3, which touted “competitive returns” without any associated risk for users.
Impermanent loss refers to losses incurred by liquidity providers in decentralized finance when one token in a pool loses value compared to another token. The loss is considered impermanent as the token’s value may be restored in future trading conditions. However, if the investor withdraws the token from the pool, the loss becomes realized.
On June 19, 2022, Bancor witnessed a surge in withdrawals, resulting in a temporary halt in ILP. While investors could still withdraw their assets, they experienced losses that the ILP was supposed to protect against. The lawsuit alleges that these losses amounted to nearly 50% of the investors’ LP Program investment, totaling tens of millions of dollars for U.S. retail investors.
The plaintiffs also assert that the DAO’s founders retained significant control over Bancor, despite its purported decentralized nature. They argue that Bancor’s LP Program qualifies as a binding investment contract and a security under U.S. law, and that had the defendants complied with registration and disclosure requirements, the investors would not have participated in the LP Program.
The lawsuit levels six charges against the defendants, including violations of the Securities Act of 1933 and the Exchange Act of 1934, breach of contract, and unjust enrichment. The plaintiffs seek restitution, damages, and interest for the alleged wrongdoing.
