A federal judge in Texas has issued a default judgment against Bancor DAO, the entity behind the decentralized finance platform Bancor, due to its failure to respond to a digital summons.
Judge Robert Pitman rendered the judgment after Bancor DAO did not show up to defend itself following a summons that was posted on the DAO’s forum in January 2024.
“Defendant Bancor DAO has not provided an answer or defended itself within the designated timeframe, and the plaintiffs have demonstrated this failure,” stated district court clerk Philip Delvin on March 13.
The class action lawsuit pertains to investors who allege they suffered losses amounting to tens of millions due to the exchange’s lack of warnings regarding liquidity issues during a surge in withdrawals in 2022.
The plaintiffs, who initiated the suit in May 2023, contend that Bancor misled investors about its impermanent loss protection features for liquidity providers and also asserted that its token operated as an unregistered security.
They claim that Bancor’s impermanent loss protection program was functioning at a deficit. To mitigate this, it introduced a new product, v3, which promised, “some of the most competitive returns available… without requiring users to assume any risk.”
Impermanent loss occurs in decentralized finance automated market maker systems when liquidity providers deposit assets into a pool, resulting in a situation where one of the tokens diminishes in value compared to another in that pool.
In June 2022, Bancor suspended its impermanent loss protection, attributing the move to “hostile” market conditions.
Additionally, the plaintiffs argued that Bancor DAO constitutes an “unincorporated general partnership” comprised of vBNT token holders, and thus could be sued in this format.
The case had earlier been completely dismissed due to the protocol developers being located outside the United States but was reopened in December.
The plaintiffs pointed out that the DeFi platform “does not seem to be registered in any jurisdiction and lacks a physical office, mailing address, officers, directors, or appointed agents.”
Bancor operates as an on-chain liquidity protocol, facilitating automated, decentralized exchanges across various blockchains. Currently, it has $38 million in total value locked, a steep decline of 98% from its peak in May 2021.
The ruling aligns with precedents set in similar cases, including one where the Commodity Futures Trading Commission secured a default judgment against Ooki DAO.
Additionally, a federal judge in California ruled in November that DAOs and their governing members can be sued in cases involving unregistered securities.