The regulatory body for the decentralized finance (DeFi) protocol, BarnBridge, announced on December 22 that it had reached a settlement with the US Securities and Exchange Commission (SEC) and consented to stop the “unregistered offer and sale of structured finance crypto product.” As part of the enforcement action, the agency has issued a cease and desist order.

BarnBridge gave customers the option to “earn a fixed return on their deposits by swapping variable APYs from money markets for a fixed APY,” per the company’s current documentation. The oldest recorded version of the Barnbridge documentation states that BOND, the protocol’s governance token, was first given out as compensation to liquidity providers for Uniswap pools. BarnBridge DAO, the entity that is the respondent in the SEC enforcement case, is made up of all BOND token holders collectively.

The SEC accuses BarnBridge DAO and its founders, Tyler Ward and Troy Murray, of marketing “SMART Yield Bonds,” a structured investment instrument that paid investors a fixed rate of return from an asset pool known as a “SMART Yield Investment Pool,” in its cease and desist order. To obtain the rate of return, the pools exchanged the assets of investors for assets from “third-party lending platforms” that bore interest.

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.

The order states that 5% of the gains made by investors in SMART Yield Bonds were levied by BarnBridge DAO as a fee. This money was allocated to a smart contract known as the “BarnBridge DAO Treasury.” The DAO decided how to allocate these treasury assets during the course of the protocol’s operation to cover a range of business expenses, including as blockchain transaction fees, website hosting fees, programmer contracts, and Ward and Murray’s wages.

According to the agency, the SMART Yield Investment Pools must register with the SEC since they are “Unregistered Investment Companies” under the terms of the U.S. Investment Company Act. Furthermore, according to the SEC, BarnBridge DAO is obligated to complete this registration on behalf of the pools since it is the “operator” of these pools.

The notification states that BarnBridge DAO has been ordered by the SEC to use the money it has amassed in its treasury to pay a $1.4 million disgorgement to the U.S. Treasury. Additionally, it mandated that Ward and Murray pay $125,000 in civil fines apiece. It is mandated that the DAO refrain from breaking any more securities laws in the United States.

It appears that BarnBridge has not been operational since July 6. On that day, Douglas Park, the DAO’s elected counsel, declared on Discord that the DAO was under SEC investigation and that “existing liquidity pools should be closed, and no more liquidity pools should be started.”

Ward made a public announcement in October announcing that the SEC has issued an order against the DAO. But he was unable to provide evidence because of the “non-public nature” of the proceedings, of the order. The DAO voted to approve Ward, Murray, and Park’s compliance with the directive in response.