Bancor DAO Faces Default Judgment in $100M DeFi Lawsuit

A Texas federal judge has entered a default judgment against Bancor DAO, the operator of the decentralized finance platform Bancor, after it failed to respond to an online summons. The summons, posted on the DAO’s forum in January 2024, went unanswered, leading Judge Robert Pitman to issue the judgment in favor of the plaintiffs. The court clerk, Philip Delvin, noted on March 13 that Bancor DAO had failed to defend itself within the allowed time frame, thereby allowing the plaintiffs to demonstrate their case.

The class action lawsuit involves investors who claim they lost tens of millions of dollars due to the exchange’s failure to warn about liquidity issues during a 2022 withdrawal spike. The plaintiffs, who filed the suit in May 2023, allege that Bancor deceived investors about its impermanent loss protection mechanism for liquidity providers and claimed its token was an unregistered security. They argued that Bancor’s Impermanent Loss Protection (ILP) operated at a deficit and attempted to cover this by launching a new product, v3, which promised competitive returns without risk to users.

Impermanent losses occur within DeFi automated market maker models when liquidity providers deposit assets into a pool, and one of the tokens loses value against another in the pool. Bancor paused its impermanent loss protection in June 2022, citing “hostile” market conditions. The plaintiffs also argued that Bancor DAO is an “unincorporated general partnership” consisting of vBNT tokenholders and could be sued in that capacity. The case was previously dismissed entirely because the protocol developers were not based in the United States, but was reopened in December. The plaintiffs noted that the DeFi platform “does not appear to be registered in any jurisdiction and has no physical office location, mailing address, officers, directors, or appointed agents.”

Bancor is an onchain liquidity protocol that enables automated, decentralized exchange across blockchains. The ruling follows precedent from a similar case where the Commodity Futures Trading Commission won a default judgment against Ooki DAO. A California federal judge also ruled in November that DAOs and their governing members can be sued in cases involving unregistered securities. This development underscores the legal challenges that decentralized autonomous organizations (DAOs) face when navigating traditional legal systems. DAOs, which operate on blockchain technology and are governed by smart contracts, often struggle with compliance and legal recognition due to their decentralized nature. The court's decision highlights the need for DAOs to engage with legal processes and ensure they are represented in court proceedings. Failure to do so can result in adverse judgments, as seen in this case. The judgment against Bancor DAO serves as a reminder to other DAOs to take legal summonses seriously and to seek legal counsel when necessary. This incident also raises questions about the legal framework for DAOs and the need for clearer guidelines on how these organizations should interact with the legal system. As the use of blockchain technology and DAOs continues to grow, it is crucial for legal systems to adapt and provide clear regulations to ensure that these organizations can operate within the law. The judgment against Bancor DAO is a significant development in the legal landscape of DAOs and highlights the importance of compliance and legal representation for these decentralized organizations.