On December 22, it was announced that BarnBridge, a decentralized finance (DeFi) protocol, has settled with the U.S. Securities and Exchange Commission (SEC). As part of the settlement, BarnBridge has agreed to stop the issuance and sale of unregistered structured finance cryptocurrency products, following a cease-and-desist order from the SEC.
BarnBridge's platform enables users to earn fixed returns by converting variable Annual Percentage Rates (APRs) from money markets into fixed APRs. The BOND token, BarnBridge's governance token, was initially distributed as rewards to liquidity providers on Uniswap. These BOND token holders form the BarnBridge Decentralized Autonomous Organization (DAO), now a defendant in the SEC's enforcement action.
The SEC's order claims that BarnBridge DAO and its founders, Tyler Ward and Troy Murray, were marketing "SMART Yield Bonds." These bonds offer a fixed return from a collective pool of assets, termed the “SMART Yield” investment pool. The pool acquires income by swapping investors' assets with income-generating assets from external lending platforms.
This income is then allocated between "senior" and "junior" investors. Senior investors are guaranteed a fixed return, while junior investors' returns vary. If the returns are inadequate to cover senior investors, junior investors' assets compensate the shortfall. Conversely, excess returns above the senior threshold benefit junior investors. This structure ensures fixed returns for senior investors and potentially higher returns for junior investors willing to accept more risk.
The SEC's order notes that BarnBridge DAO deducts a 5% fee from SMART Yield Bond investors' profits, which is deposited into a smart contract named the “BarnBridge DAO Treasury.” This treasury is used to fund various operational costs, including blockchain fees, website hosting, programming contracts, and salaries for Ward and Murray.
The SEC contends that the SMART Yield Investment Pool operates as an unregistered investment company under U.S. law and should have registered with the SEC. Furthermore, the SEC argues that as the operator of these pools, BarnBridge DAO should have registered them. Consequently, the SEC has ordered BarnBridge DAO to forfeit $1.4 million in profits to the U.S. Treasury, and imposed civil penalties of $125,000 each on Ward and Murray. The DAO is also instructed to halt any further breaches of U.S. securities laws.
BarnBridge has been inactive since July 6, following advice from Douglas Park, a lawyer representing the DAO, who recommended closing existing liquidity pools and not launching new ones amidst the SEC investigation. In October, Ward disclosed the SEC's order against the DAO, but couldn't provide proof due to confidentiality of the proceedings. Subsequently, the DAO authorized Ward, Murray, and Parker to adhere to the SEC's order.
