Bancor DAO Faces Default Judgment in $100M Investor Lawsuit

A Texas federal judge has entered a default judgment against Bancor DAO, the entity behind the decentralized finance platform Bancor, after it failed to respond to an online summons. The judgment was issued by Judge Robert Pitman following Bancor DAO's failure to appear in defense after a summons was posted on the DAO’s forum in January 2024. The court clerk, Philip Delvin, noted on March 13 that the defendant had not answered or defended itself within the allowed time frame, and that the plaintiffs had demonstrated this failure.

The class action lawsuit involves investors who allege they lost tens of millions of dollars due to Bancor's failure to warn about liquidity issues during a 2022 withdrawal spike. The plaintiffs, who filed the suit in May 2023, claim that Bancor deceived investors about its impermanent loss protection mechanism for liquidity providers and that its token was an unregistered security. They argue that Bancor's impermanent loss protection (ILP) mechanism operated at a deficit and attempted to cover this by launching a new product, v3, which promised high 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 contend that Bancor DAO is an "unincorporated general partnership" consisting of vBNT tokenholders and can be sued in that capacity. The case was previously dismissed entirely because the protocol developers were not based in the United States, but it was reopened in December.

The plaintiffs assert 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 total value locked in Bancor has significantly decreased, down 98% since its peak in May 2021.

The ruling against Bancor DAO follows a precedent set by a similar case where the Commodity Futures Trading Commission won a default judgment against Ooki DAO. Additionally, a California federal judge ruled in November that DAOs and their governing members can be sued in cases involving unregistered securities. This judgment underscores the legal challenges faced by decentralized autonomous organizations (DAOs) and highlights the potential consequences of ignoring legal summonses. The case serves as a reminder of the importance of compliance and legal engagement for DAOs operating in the decentralized finance space.