SEC files charges in first DeFi technology case
Wall Street’s top regulator is following through on its leader’s warnings to the crypto world.
Just days after Securities and Exchange Commission Chair Gary Gensler called the crypto markets the “Wild West,” the SEC has filed what it says is its first case involving decentralized finance technology. In a 15-page complaint released Friday, the SEC alleges that Blockchain Credit Partners and its owners—Gregory Keough and Derek Acree—sold more than $30 million of unregistered securities in the form of two digital tokens that were offered through smart contracts on the Ethereum blockchain from February 2020 to February 2021. SEC Commissioner Hester Peirce, who is lovingly known in the digital asset world as “Crypto Mom,” tweeted after the complaint’s release that it was a “DINO (decentralized in name only) project.”
“The federal securities laws apply with equal force to age-old frauds wrapped in today’s latest technology,” the SEC’s Complex Financial Instruments Enforcement Unit Chief, Daniel Michael, said in a statement. “Here, the labeling of the offering as decentralized and the securities as governance tokens did not hinder us from ensuring that DeFi Money Market was immediately shut down and that investors were paid back.”
DeFi has become one of the hottest areas in crypto and finance over the past several months, with deposits into the smart contracts that underscore DeFi programs having recently hit more than $60 billion after totaling less than $1 billion to start off 2020. Former Binance.US CEO Brian Brooks, who resigned Friday and was the country’s top banking regulator under former President Donald Trump, recently wrote that DeFi, though not risk-free, has the potential to help “solve many financial system risks in one leap of technology, not just address them incrementally.”
However, Gensler, who spent time researching blockchain technology at MIT, says that many platforms in the DeFi world likely run afoul of not only federal securities laws, but also commodities and banking laws. “A typical trading platform has more than 50 tokens on it. In fact, many have well in excess of 100 tokens,” Gensler said this week in a speech. “While each token’s legal status depends on its own facts and circumstances, the probability is quite remote that, with 50 or 100 tokens, any given platform has zero securities.” The SEC is not new to cracking down on unregistered securities offerings in the crypto markets, as the regulator under former Chairman Jay Clayton aggressively ramped up its scrutiny of initial coin offerings, including in the high-profile but controversial case against Ripple.
In the case of Blockchain Credit Partners, which did business as DeFi Money Market, the SEC alleged the company and its owners sold digital assets called mTokens that purportedly were able to offer investors 6.25% interest on top of their investments because they were supposedly backed by “real world” assets like car loans. But because investors had “a reasonable expectation of obtaining a future profit” from the tokens, the SEC said they fell into the bucket of being a security. The other assets DeFi Money Market offered, DMG tokens, were said to be able to give investors a seat at the table in determining how the company was run as well as an opportunity to share in its profits. But the SEC says those tokens qualified as investment contracts, making them securities as well.
Keough, Acree, and the company itself did not admit or deny the SEC’s findings in settling the case. But they did agree to pay back all $12.8 million of its gains, with Keough and Acree additionally responsible for paying $125,000 each in penalties. A lawyer listed as representing them declined to comment to Fortune on the settlement.
Update, August 6, 2021: This article has been updated with information about Binance.US CEO Brian Brooks’s resignation.
Subscribe to Fortune Daily to get essential business stories straight to your inbox each morning.