DeFi Protocol Bancor Faces Lawsuit Over ‘Permanent Loss Protection’
On thursday, May 11, 2023, a group of investors filed a class-action lawsuit in the United States District Court for the Western District of Texas against the founders of automated crypto-asset exchange Bancor Protocol for misleading investors.
According to the lawsuit, Bancor deceived investors about its impermanent loss protection (ILP) mechanism. Defendants allegedly offered different investment products described as “versions” of Bancor. Version 1 (v1) was launched in 2017 followed by v2 in April 2020 and v2.1 in October 2020. Versions 2 and 2.1 introduced the ILP, a mechanism that protects liquidity providers (LPs) against losses incurred by depositing assets on the exchange.
“Defendants touted impermanent loss protection to LPs as a flagship feature of Bancor, and it successfully attracted LPs to the protocol,” the lawsuit said. “At its height, LPs had more than $2.3 billion worth of crypto assets invested in v2.1.”
However, the lawsuit claims that the implementation of Version 2.1 created serious deficits for the protocol. The lawsuit alleges that “defendants knew about these deficits and the associated risks and concealed them from LPs, hoping to grow their way out of the problem.”
On May 11, 2022, Bancor launched Version 3 of the protocol, which promised immediate “100% protection” against losses and “the most competitive return anywhere.” On June 19, 2022, however, the risks materialized with a spike in withdrawals, leading to a “pause” in ILP.
“Instead of making those payments, Defendants unilaterally purported to “suspend” impermanent loss protection, which meant that withdrawing LPs incurred the very losses that Defendants had promised to “100% protect” against,” the lawsuit said. “Defendants also imposed additional severe haircuts on withdrawing LPs, initially without disclosing them at all, but instead simply failing to pay withdrawing LPs amounts they were indisputably owed under the terms of their investment in the LP Program. Plaintiffs and other U.S. investors lost tens of millions of dollars as a result. In many instances, the loss was catastrophic for the individual investor.”
The lawsuit contends that the LP Program qualifies as a security and a binding investment contract under US law.
“Had Defendants complied with applicable registration and disclosure requirements, Plaintiffs and other class members would not have invested in the LP Program, and they would have avoided losses approaching 50% of their LP Program investment. Accordingly, Defendants owe damages, restitution, and other relief to Plaintiffs and those similarly situated,” the lawsuit said.
A copy of the original filing can be found here.
