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Risk “curator” Re7 Labs has sent a cease and desist letter to a “whistleblower,” via its legal representative Pillsbury Winthrop Shaw Pittman LLP.
The letter comes in response to accusations that Re7 Labs failed in its responsibility for managing risk in certain vaults.
Depositors to these vaults were exposed to last month’s Stream Finance collapse and the subsequent domino-effect that hit similar projects.
The allegations refer to Re7 Labs’ actions before, during, and after the collapse.
The “whistleblower” contacted Protos Leaks on behalf of a group of affected depositors who claim to have lost money lending into Re7 Labs’ tether (USDT) market on Euler Finance, a DeFi lending platform.
The allegations
In their tip, the whistleblower specifically lists as Re7 Labs’ failings:
- Asset selection and LTV configuration
- Monitoring abnormal borrowing or concentration risk
- Restricting borrowing during suspicious activity
- Executing liquidations or parameter changes when collateral deteriorates
- Incident disclosure and communication with users and partners
Re7 Labs has taken issue with a previous report, which was forwarded to media outlets and requested the suspension of the fund’s (ultimately unsuccessful) nomination for the HFM European Performance Awards.
The report, which also extended to other firms, described an “attacker” borrowing large quantities of USD1 and USDT against USDX.
Later, a series of large USDX sales “intentionally” crashed USDX’s price, depleting on-chain liquidity and causing liquidation of the collateral to fail. The funds were allegedly sourced from addresses linked to Stables Labs, the issuer of USDX.
It also slams Euler Finance, which it claims “failed to implement safeguards,” and Binance, which was “allegedly unresponsive to requests from victims to freeze” the proceeds.
Read more: High yields to haircuts: Has DeFi learned anything from yield vault collapse?
The response
A representative of Re7 Labs told Protos that the allegations are “serious, inaccurate and unsubstantiated, and distract from the ongoing legal process and genuine recovery efforts.”
It insists that “responsibility lies with Stream Finance and/or Stables Labs” and that, as a “fellow lender,” it has “also suffered losses.”
The cease and desist letter, seen by Protos, denies any “wrongdoing, misconduct, or breach of any legal or other obligation… in the strongest possible terms.”
As well as the cease and desist demand, the letter also requests a “formal written apology” and corrective statement, confirmation of identity, and the deletion of messages containing the allegations.
Neither response directly addresses the specific claims made by the whistleblower, however.
Protos sent a follow-up pushing for a response to the specific accusations around collateral selection, and awareness of “abnormal” borrowing, but hasn’t yet received a reply.
Read more: David Sacks sends silly legal threat to the New York Times
Yield vault armageddon
In late October, concerns over a “daisy chain of circular lending” began to circulate among DeFi yield farmers.
Then, on November 4, Stream Finance announced a loss of $93 million, triggering a scramble to withdraw and unwind risky positions across the DeFi yield vault ecosystem.
As confidence in vault tokens such as Stream’s xUSD, Elixir’s deUSD and Stables Labs USDX evaporated, a mass depegging followed.
The tokens had been widely used as collateral to borrow mainstream stablecoins. Along with the collateral’s value, borrowers’ incentive to repay their loans also evaporated.
Some users feel that lending platforms and vault ‘curators’ didn’t do enough to protect depositors, and that risks were opaque. Receipt tokens for stablecoin vaults, many with USD in the name, were seen as pseudo-stablecoins generating yield from “delta-neutral” strategies.
Read more: Stream Finance meltdown: winners and losers in DeFi ‘risk curator’ reckoning
Ultimately, as we saw last cycle, generating high yields on stablecoin deposits requires risky levels of leverage.
Previous statements from Re7 Labs have indicated at least $27 million of exposure to depegged assets deUSD and USDX.
