On 22 December 2023, the SEC announced that it had reached a settlement with BarnBridge DAO, a defi protocol for trading structured derivatives, and its founders. The stipulated order finds that they offered and sold unregistered crypto asset securities known as SMART Yield bonds.  The SEC had also charged BarnBridge and its founders with violations stemming from operating BarnBridge’s SMART Yield pools as unregistered investment companies.  The stipulated order led to the immediate closure of BarnBridge DAO.

According to the SEC, between March 2021 and May 2023, more than $509 million worth of crypto assets were invested into the SMART Yield pools without filing a registration statement with the Commission or demonstrating that the offer and sale qualified for an exemption from registration. 

BarnBridge DAO and its founders, Tyler Ward and Troy Murray, will pay more than $1.7 million to settle charges, including disgorgement of nearly $1.5 million of proceeds from the sales as well as civil penalties of $125,000 for each of the founders. The settlement proceeds were characterized as “disgorgement” and will be directed to the U.S. Treasury. Although BarnBridge DAO and its founders did not admit or deny the SEC’s findings, they agreed to cease-and-desist orders prohibiting them from further offerings of SMART Yield bonds. 

We consider two main reasons why this settlement is notable to the crypto market:

1. According to the SEC, using blockchain technology for the unregistered offer and sale of structured finance products to retail investors runs afoul of the securities laws.

According to the SEC, BarnBridge compared the SMART Yield bonds to tradfi asset-backed securities and marketed them broadly to the public, including through social media platforms, such as YouTube interview channels.  Investors could purchase “Senior” or “Junior” SMART Yield bonds through BarnBridge’s website, which attracted more than $509 million in investments. Investor assets were exchanged for crypto assets issued by third-party lending platforms that generated interest income to pay investors. The SEC also stated that BarnBridge DAO should have filed a registration statement with the SEC, or qualified for an exemption, in offering and selling SMART Yield bonds as fixed-income notes.  Further, according to the SEC Order, BarnBridge did not take any steps to prevent U.S. investors from buying into its SMART Yield product, it stated “there was no mechanism for ensuring that investors in each of the SMART Yield Pools were accredited or located outside the United States.” The SEC stated that “the use of blockchain technology for the unregistered offer and sale of structured finance products to retail investors runs afoul of the securities laws.”

2. Decentralization does not immunise DeFi from regulation.

The SEC called BarnBridge a “purportedly decentralized” autonomous organization.  Its founders were the two largest individual holders of BarnBridge’s governance tokens (called BOND) and as the governance tokenholders held voting power of the BarnBridge DAO, “every proposal approved by the DAO needed, and received, Ward and Murray’s votes to reach a quorum.” 

While the SEC has brought action against DAOs previously (for example, In the Matter of American CryptoFed DAO LLC), it appears that the SEC is keen to highlight to the crypto industry that DAOs are not immune from the law because of their decentralised or autonomous structures. As the SEC stated, “this case serves as an important reminder that [U.S. Securities] laws apply to all who wish to access our capital markets, regardless of whether they are, or purport to be, incorporated, decentralized or autonomous.”