A group of investors has filed a class action lawsuit against the Bancor decentralized autonomous organization (DAO); its operator, the BProtocol Foundation; and its founders in the US District Court for the Western District of Texas. The plaintiffs allege that, among other th ings , Bancor deceived investors regarding its impermanent loss protection (ILP) mechanism for liquidity providers and was an unregistered security.
According to the lawsuit, Bancor's v2.1 investment product, launched in October 2020, is the second investment product to feature an ILP whose operating deficit was known to the defenders and sought to be covered by the introduction of a new product, v3, which Promising "some of the most competitive returns anywhere [...] without any risk to the user."
Impermanent loss occurs in the automated market maker model of decentralized finance when liquidity providers deposit assets into a pool and one token involved loses value relative to another token in the pool. It is called impermanent because the trading conditions may restore the value of the token at a later date. Losses are not realized unless investors withdraw tokens from the pool. On June 19, 2022, Bancor saw a surge in withdrawals that resulted in a "pause" from the ILP. Investors can still withdraw their assets, but they experience losses that the ILP was designed to prevent. This resulted in “losses approaching 50% of its LP [liquidity provider] planned investments,” costing US retail investors tens of millions of dollars, the lawsuit says.
In Addition, The Plaintiffs Claim that the Founders of the Dao Retaind Control Over It: "While Bancor is Purportedly Run by a Decentralized Autonomous Organization ("Bancor Dao"), Defendants Retain Nearly Complete Control Over Bancor, Both Directly (Controlling Its Capital, employees, and code) and indirectly (controlling and manipulating Bancor's DAOs)).
They also claim that Bancor's LP plans "are binding investment contracts and securities under US law." And: "Plaintiffs and other class members would not have invested in the LP scheme had defenders complied with applicable registration and disclosure requirements." Plaint iffs brought six charges against defenders, including violations of the Securities Act of 1933 and the Exchange Act of 1934, as well as breach of contract and unjust enrichment. They seek compensation, damages and interest.
