March 27, 2024
BarnBridge Faces SEC Action
Latest Cryptocurrency News

SEC Settlement: BarnBridge Agrees to Cease Unregistered Crypto Product Sales

BarnBridge, a decentralized finance (DeFi) protocol, has reached a settlement with the United States Securities and Exchange Commission (SEC), agreeing to halt its unregistered offering and sale of a structured finance crypto product. As per the SEC’s announcement on December 22, a cease-and-desist order has been issued as part of the regulatory enforcement action. The protocol previously allowed users to earn fixed returns on their deposits by exchanging variable APYs from money markets for a fixed APY.

Initially, the protocol’s governance token, BOND, was rewarded to liquidity providers for Uniswap pools, forming the BarnBridge decentralized autonomous organization (BarnBridge DAO), which is at the center of the SEC enforcement action.

The SEC alleges that BarnBridge DAO, along with founders Tyler Ward and Troy Murray, promoted “SMART Yield Bonds,” a structured investment product that offered a fixed rate of return from a pool of assets known as a “SMART Yield Investment Pool.” These pools generated returns by swapping investors’ assets for yield-bearing assets from third-party lending platforms.

According to the SEC’s cease and desist order, the revenue generated was divided between “senior” and “junior” tranche investors. Seniors were assured a fixed rate of return, while juniors received a variable rate. If the return wasn’t sufficient to cover senior rewards, junior tranche assets compensated seniors. Conversely, excess revenue above senior payouts went to junior tranche investors. This structure aimed to guarantee fixed returns to seniors while allowing juniors, with a higher risk tolerance, to earn more during periods of greater revenue. The SEC also noted that BarnBridge DAO charged SMART Yield Bond investors a 5% fee on their profits, allocated to the “BarnBridge DAO Treasury.” These funds were used for various business expenses, including transaction fees, website hosting, programmer contracts, and the salaries of Ward and Murray.

The SEC classified the SMART Yield Investment Pools as “unregistered investment companies” under the U.S. Investment Company Act, mandating registration with the SEC. Furthermore, the SEC deemed BarnBridge DAO as the “operator” of these pools, thus requiring the DAO to undertake the necessary registration.

Consequently, the SEC’s order demands BarnBridge DAO disburse $1.4 million to the U.S. Treasury from its accumulated Treasury funds. Additionally, Ward and Murray are individually fined $125,000 in civil penalties. The DAO must cease and desist from further violations of U.S. securities laws.

Since July 6, BarnBridge appears to have ceased operations following an announcement by the elected attorney, Douglas Park, on Discord. Park advised closing existing liquidity pools and refraining from starting new ones due to an ongoing SEC investigation. Ward later publicly acknowledged the SEC’s order against the DAO in October, although he couldn’t provide evidence due to the non-public nature of the proceedings. In response, the DAO voted to empower Ward, Murray, and Park to comply with the order.

Image by freepik

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