Saturday, April 13, 2024

Fixed yield protocol BarnBridge DAO settles with SEC for $1.7M

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The governing body for decentralized finance (DeFi) protocol BarnBridge has settled with the United States Securities and Exchange Commission (SEC) and agreed to stop the “unregistered offer and sale of structured finance crypto product,” according to a Dec. 22 announcement from the financial regulator. The agency has issued a cease and desist order as part of the enforcement action.

Cease and desist order against BarnBirdge DAO. Source: SEC

According to its current documents, BarnBridge allowed users to “earn a fixed return on their deposits by swapping variable APYs from money markets for a fixed APY.” The protocol’s governance token, BOND, was originally distributed as a reward for liquidity providers for Uniswap pools, according to the earliest archived version of the Barnbridge documents. Holders of the BOND token collectively form the BarnBridge decentralized autonomous organization (BarnBridge DAO), which is the respondent in the SEC enforcement action.

In its cease and desist order, the SEC claims that BarnBridge DAO and founders Tyler Ward and Troy Murray advertised “SMART Yield Bonds,” a structured investment product that paid investors a fixed rate of return from a pool of assets, called a “SMART Yield Investment Pool.” To earn the rate of return, the pools swapped investors’ assets for yield-bearing assets from “third-party lending platforms.”

The resulting revenue was then divided between “Senior” and “Junior” tranche investors. Senior investors were guaranteed a fixed rate of return, the SEC stated, while Junior investors were given a variable rate. If the rate of return was not high enough to pay out the full set of rewards for the Senior tranches, Junior tranche assets were used to compensate Senior investors. 

On the other hand, if the rate of return was greater than needed to pay Senior investors, the extra revenue was given to Junior tranche investors. In this way, the protocol guaranteed a fixed rate to Senior investors while allowing Junior investors with greater risk appetite to earn more when revenue was greater.

Related: What is yield farming in decentralized finance (DeFi)?

According to the order, BarnBridge DAO charged SMART Yield Bond investors 5% of their profits as a fee, which went to a smart contract called the “BarnBridge DAO Treasury.” Throughout the time the protocol operated, the DAO voted to distribute these treasury funds to pay for a variety of business costs, including blockchain transaction fees, website hosting fees, programmer contracts, and the salaries of Ward and Murray.

The SMART Yield Investment Pools are “Unregistered Investment Companies” as defined by the U.S. Investment Company Act and are therefore required to register with the SEC, the agency claimed. In addition, the SEC claimed that BarnBridge DAO is the “operator” of these pools and was therefore required to carry out this registration on the pools’ behalf.

According to the announcement, the SEC has ordered BarnBridge DAO to pay a $1.4 million disgorgement to the U.S. Treasury, using the funds it has accumulated in its treasury. It has further ordered that Ward and Murray each pay $125,000 in civil penalties. The DAO has been ordered to cease and desist from any further violations of U.S. securities laws.

BarnBridge has apparently been shut down since July 6. On that date, the DAO’s elected attorney, Douglas Park, announced on Discord that “existing liquidity pools should be closed, and no more liquidity pools should be started” due to the DAO being investigated by the SEC.

In October, Ward announced publicly that the SEC had issued an order against the DAO. However, he couldn’t show proof of the order due to the “non-public nature” of the proceedings. In response, the DAO voted to authorize Ward, Murray, and Park to comply with the order.

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