SEC Shuts Down $30 Million Defi Money Market, Charges For 2 Executives
The U.S. Securities and Exchange Commission (SEC) has taken its first ever enforcement action involving decentralized finance (defi). SEC has imposed charges on a defi platform and its executives for unregistered securities sales of more than $30 million and misleading investors.
SEC’s First Move Against DeFi
The commission announced Friday that it has taken the first enforcement action involving decentralized finance (defi). The case involves “securities using defi technology.”
The regulator charged two Florida men — Gregory Keough and Derek Acree — and their Cayman Islands company, Blockchain Credit Partners, for “unregistered sales of more than $30 million of securities.” The three were also charged “for misleading investors concerning the operations and profitability of their business Defi Money Market.”
They used smart contracts and defi technology to sell two types of digital tokens: mtokens and DMM governance tokens (DMG). The former promised to pay 6.25% interest while the latter purportedly “gave holders certain voting rights, a share of excess profits, and the ability to profit from DMG governance token resales in the secondary market.”
Keough and Acree allegedly claimed that DeFi Money Market could pay interest and profits by using investor assets to buy real-world assets that generated income, such as car loans. The SEC, however, says that the price volatility of the digital assets used to buy the tokens was too high, presenting a significant roadblock to Keough and Acree’s ability to pay for the appreciation they promised with each token.
When they realized that “the price volatility of the digital assets used to purchase the tokens created risk that the income generated through income-generating assets would be insufficient to cover appreciation of investors’ principal,” they did not inform investors. Instead, they “misrepresented how the company was operating, including by falsely claiming that Defi Money Market had bought car loans that they displayed on Defi Money Market’s website.”
The SEC noted that the defendants “used personal funds and funds from the other company they controlled to make principal and interest payments for mtoken redemptions.”
Daniel Michael, Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit, says that federal securities laws “apply with equal force” to frauds involving modern technology.
“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.”
“Without admitting or denying the findings in the SEC’s order, respondents consented to a cease-and-desist order that includes disgorgement totaling $12,849,354 and penalties of $125,000 each for Keough and Acree.”
The SEC says that both the mTokens and the DMG governance tokens were sold as unregistered investment contracts. The case represents the SEC’s first involving securities and DeFi technology.
Keough and Acree consented to a cease-and-desist order from the SEC that includes a nearly $12.85-million disgorgement and penalties of $125,000 each. The men did not admit or deny the findings in the SEC’s order.
