Texas court issues judgment against Bancor DAO after it ignored summons
In a recent ruling from a Texas federal court, Bancor DAO, the operator behind the decentralized finance platform Bancor, has been dealt a significant legal blow. The court, presided over by Judge Robert Pitman, issued a default judgment against Bancor DAO after the entity failed to respond to a summons issued in January 2024. The default judgment signals a serious consequence, as it aligns with the claims made by investors in a class-action lawsuit, alleging that they suffered losses amounting to tens of millions of dollars due to Bancor’s failure to adequately inform users about liquidity issues that arose during a notable spike in withdrawals in 2022.
The default was officially entered on March 13, with district court clerk Philip Delvin noting, “Defendant Bancor DAO has failed to answer or otherwise defend itself within the time allowed.”
The lawsuit, originally filed in May 2023, centers around allegations that Bancor misled investors regarding its impermanent loss protection (ILP) mechanism, which purportedly provided safeguards for liquidity providers. Plaintiffs allege that the ILP was operating at a deficit, and Bancor attempted to mitigate this by launching v3, a new product that marketed itself as offering “some of the most competitive returns anywhere … without asking users to take on any risk.”
Impermanent losses are an inherent risk within decentralized finance (DeFi) automated market maker models, occurring when a liquidity provider’s deposited assets lose value relative to the tokens in the liquidity pool. This risk, critics point out, was not sufficiently explained to users, drawing attention to the necessity for transparency in operations concerning digital assets.
In June 2022, Bancor suspended its impermanent loss protection, attributing the decision to what it characterized as “hostile” market conditions. This development further fueled investor discontent and subsequently led to legal action.
Another significant facet of the lawsuit is the claim that Bancor DAO constitutes an “unincorporated general partnership” comprised of vBNT tokenholders, allowing for legal action against the entity itself—an assertion emphasized by the plaintiffs and reported by Law360. The case had previously been dismissed, largely due to the foreign status of Bancor’s developers, but it was revived in December, underscoring the evolving legal landscape surrounding Decentralized Autonomous Organizations (DAOs).
Bancor, which enables automated, decentralized exchanges across various blockchains, currently has approximately $38 million in total value locked, a stark decline of 98% from its peak valuation in May 2021. This dramatic reduction raises questions about the platform’s viability moving forward and the potential ramifications for investors involved.
The ruling marks a precedent in the ongoing struggle to define legal accountability for DAOs. This is not the first case illustrating this issue; notable references include a recent ruling in which the Commodity Futures Trading Commission (CFTC) successfully won a default judgment against Ooki DAO for similar reasons. Additionally, a California federal judge has ruled that members of DAOs can be held liable under partnership laws, indicating a significant shift in how these entities might be regulated moving forward.
With these developments, the future of Bancor DAO remains uncertain, as does the broader question of legal protections within the decentralized finance ecosystem. As the line between traditional finance and DeFi blurs, the results of this case could bear significant implications for investors and platforms operating in this fledgling but increasingly scrutinized space.
