A group of investors has taken legal action against the Bancor Protocol decentralized autonomous organization (DAO), its operator, BProtocol Foundation, and its founders in the United States District Court for the Western District of Texas.
The class-action lawsuit alleges that Bancor deceived investors regarding its Impermanent Loss Protection (ILP) mechanism for liquidity providers and operated as an unregistered security. The plaintiffs claim that they suffered substantial financial losses due to these actions.
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Deception Regarding Impermanent Loss Protection (ILP) on Bancor Protocol’s v2.1
According to the lawsuit, Bancor’s v2.1 investment product, launched in October 2020 and featuring ILP, operated at a deficit that the defendants knew of. To cover this shortfall, the defendants introduced a new product, v3, promising competitive returns without any associated risks. Impermanent loss occurs in decentralized finance when a liquidity provider’s deposited assets depreciate relative to other tokens in the pool. However, this loss is only realized if the investor withdraws the token from the pool.
Withdrawal Spike and Substantial Losses
On June 19, 2022, Bancor experienced a withdrawal surge, resulting in a temporary pause in ILP. During this period, investors could still withdraw their assets but faced the losses the ILP was designed to prevent. The plaintiffs argue that this led to losses of nearly 50% of their investments, totaling millions of dollars for U.S. retail investors.
Control Retained by Founders
In addition to the deception surrounding ILP, the plaintiffs claim that the founders of Bancor maintained significant control over the decentralized autonomous organization. Despite Bancor purportedly being governed by the Bancor DAO, the defendants exerted direct control over its capital, employees, and code. Furthermore, they allegedly manipulated and dominated the Bancor DAO, resulting in near-total control over the platform’s operations.
Violation of Securities Laws and Breach of Contract
The plaintiffs have brought six charges against the defendants, including violations of the Securities Act of 1933 and Exchange Act of 1934, breach of contract, and unjust enrichment. They argue that if the defendants had complied with the necessary registration and disclosure requirements, the plaintiffs and other class members would not have invested in the LP Program. As a result, the plaintiffs are seeking restitution, damages, and interest.
Conclusion
The class-action lawsuit against Bancor Protocol and its founders highlights allegations of deceptive practices and substantial financial losses suffered by investors. The plaintiffs claim that Bancor misled them by offering risk-free investments and concealed the shortfalls within their crypto asset exchange. Additionally, they argue that the defendants retained significant control over Bancor’s operations, despite the supposed decentralization. The plaintiffs seek compensation and redress for their losses as the legal proceedings unfold.
