Class Action Lawsuit Over Loss Protection Feature
The co-founders of Bancor, which provides DeFi (decentralized finance) liquidity solutions, and DAO (decentralized autonomous organization) were filed a class action lawsuit by investors on the 11th.
The plaintiffs filed a lawsuit in the District Court of Texas, USA, claiming that Bancor deceived investors about its “permanent loss protection” function and caused damage to them.
In addition, although Bancor is ostensibly operated by “Bancor DAO,” an autonomous decentralized organization, the defendant actually controls most of Bancor, including capital, employees, and code management. He also said that
The defendants are Guy Benartzi, co-founder of Bancor and others, as well as the BProtocol Foundation and the Bancor DAO.
What is a decentralized autonomous organization (DAO)?
Refers to a decentralized organization that functions autonomously. Abbreviation for “Decentralized Autonomous Organization”. Unlike general companies, there is no central administrator like a manager. Operation and management is performed by participating members and algorithms.
The “permanent loss protection” that is particularly problematic this time was an insurance function that compensates for losses that may occur when cryptocurrencies are deposited in liquidity pools.
When providing liquidity (staking) with a pair of two tokens, when one token rises (plunges), the holding ratio may fluctuate in order to balance the pool. Therefore, there is a risk that the amount of user assets will be lower than at the time of deposit.
Bancor has launched a function to compensate for this risk from version 2 in 2020, attracting investment.
In addition, version 3, which was launched in May 2022, promised immediate “100% protection” against losses and “the most competitive return anywhere”. In June, however, the risks materialized with a surge in withdrawals. Bancor has said it has “suspended” its loss protection.
The plaintiff alleges that other investors in the same situation as the plaintiff suffered losses totaling tens of millions of dollars.
Bancor said at the time that the suspension of loss protection was influenced by the collapse of “two large centralized organizations.”
Around this time, the collapse of the old Terra ecosystem was triggering a chain of defaults in the cryptocurrency industry. Cryptocurrency lending platform Celsius and cryptocurrency VC Three Arrows Capital (3AC) were facing a financial crisis.
As a result, there was a sudden withdrawal of funds from Bancor, and it seems that loss protection became impossible.
Sued for securities law violations
In addition, plaintiffs also allege that Bancor’s liquidity provider program was a “binding investment agreement.” For this reason, the company also sued for violations of securities laws and securities exchange laws, seeking damages.
Plaintiff alleges that:
Securities laws are meant to warn investors about dangers such as those seen at Bancor and its liquidity program.
Bancor’s liquidity provision program is a binding investment contract and a security under the laws of the United States.
Had the defendants registered as securities and complied with disclosure requirements, plaintiffs and other investors would have avoided investing in Bancor’s program and would have avoided a loss of nearly 50% of their investment.