SEC’s probe of puny BarnBridge DAO augurs deep DeFi crackdown

When a little known digital cooperative called BarnBridge DAO said this week it would fold in the face of an SEC investigation crypto users were aghast.

It was no surprise that Gary Gensler and the US Securities and Exchange Commission went after industry titans Binance, Coinbase, and Kraken earlier this year. But BarnBridge DAO? A tiny governance outfit with deposits of $1 million?

Last Friday, the DAO’s lawyer said on Discord that the SEC’s investigation was “ongoing and non-public,” and the co-founders would “not comment on the investigation or any matters concerning BarnBridge DAO for the time being.”

Lots of questions

But there were a number of outstanding questions: What was the scope of that investigation? Which individuals was the SEC targeting? Were they paid software engineers? Members of the cooperative? And what laws were they suspected of violating?

A recently settled case against another digital cooperative may offer some clues about what BarnBridge and its founders are facing, and what might come next for the DeFi space at large.

“While they’re separate agencies, I think we can look towards the CFTC’s case action against Ooki as informative here,” Brandon Ferrick, general counsel at B+J Studios, told DL News. “Regulators will take the position that you cannot put otherwise illegal, unregistered activity — debt instruments — into a DAO and it suddenly becomes okay.”

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The Commodity Futures Trading Commission sued Ooki DAO in September, arguing it functioned as an unregistered platform for commodities trading. Ooki never defended itself in court, and last month a judge ruled in the CFTC’s favour, handing down a $650,000 fine.

BarnBridge offers users interest rate swaps, which enable them to swap variable yields — such as those offered by DeFi lender Aave — for fixed yields. Its slogan is “DeFi-native solutions for credit and yield.”

On July 6, the day the venture’s attorney, Douglas Park, took to Discord to disclose the SEC investigation and to tell users the protocol would effectively shutter.

‘To reduce potential further legal liability, existing liquidity pools should be closed, and no more liquidity pools should be started.’

—  Douglas Park

“To reduce potential further legal liability, existing liquidity pools should be closed, and no more liquidity pools should be started,” he wrote. “All work on BarnBridge related products should stop, and individuals should no longer be compensated for any work they do related to BarnBridge until further notice.”

The SEC will probably argue that BarnBridge’s business was unlawful, Ferrick said. The BarnBridge website offers users “DeFi-Native Solutions for Credit and Yield.”

Closing down

“They’re basically marketing that their products are the same thing as existing, regulated products but you can use them through their site [because] DeFi,” Ferrick said. “They even call their token a $BOND.”

It’s no surprise BarnBridge decided to fold amid an SEC investigation, said Matt McGuire, a former senior prosecutor for the attorney general of Virginia and general counsel at Violet, a crypto identity platform.

Business decision

“We don’t have all the facts, but closing down immediately because of a civil agency (SEC) subpoena is a business decision to me, not a legal requirement,” he told DL News. “Responding to government investigations is very time consuming and often prohibitively expensive for smaller organisations due to the legal fees and outside expertise generally required to handle the matter.”

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The SEC’s investigation of BarnBridge shows that size doesn’t matter when it comes to crypto. In March, the agency sued LBRY, an obscure crypto-based file sharing network.

“LBRY was an earlier signal of the SEC’s indifference as to a project’s size or intentions, and to regulate by enforcement,” Erich Dylus, an independent attorney who advises DAOs, told DL News. “The crypto-hostile regulators also like going after, or securing settlements with, smaller projects as easy wins and faux-precedence.”

More DAO scrutiny

BarnBridge is just the latest entrant in an expanding club.

In March Jared Grey, the head of Sushi DAO, announced he had received an SEC subpoena. Sushi DAO governs SushiSwap, one of the largest decentralised exchanges with $350 million in deposits.

In a statement, Grey — whose official title at the DAO is “head chef” — declined to say what information the SEC had requested in its subpoena.

“To the best of our knowledge, the SEC has not (as of this writing) made any conclusions that anyone affiliated with Sushi has violated United States federal securities laws,” Grey said.

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DL News’ attempts to access the BarnBridge governance forum Wednesday were unsuccessful, with website requests timing out. On Discord, there did not appear to be any discussion regarding legal counsel ahead of the vote to hire Park.

Park confirmed to DL News the authenticity of his Discord post in a LinkedIn message. He also said BarnBridge had received a subpoena, but declined to say when.

BarnBridge co-founder Tyler Scott War took to Twitter to say he was “gutted” by the decision to close shop and would be leaving crypto “indefinitely.”

In a message to DL News, Ward declined to say when BarnBridge knew it was under investigation.

Have a tip about DAOs? Contact the author at aleks@dlnews.com.