Two Florida men closed down their Cayman Islands blockchain company and paid about US$13 million to settle charges brought by the US Securities and Exchange Commission for the unregistered sales of more than $30 million of securities using smart contracts and so-called ‘decentralised finance’ (DeFi) technology.
The SEC alleged that in addition they misled investors about the operations and profitability of their DeFi Money Market business.
According to the SEC’s order, Gregory Keough, Derek Acree and their company Blockchain Credit Partners offered and sold two types of digital tokens in unregistered offerings through DeFi Money Market from February 2020 to February 2021.
The so-called mTokens could be purchased using specified digital assets and promised to pay 6.25% interest, whereas the DMG ‘governance tokens’ purportedly gave holders certain voting rights, a share of excess profits, and the ability to profit from token resales in the secondary market.
According to the SEC, the token offering suggested that interest and profits would be based on income generating “real world” assets, such as car loans, that would be bought with investor funds.
The SEC order found that after publicly unveiling DeFi Money Market, its operators realised the price volatility of the digital assets used to purchase the tokens created a risk that the income generated from real world assets would be insufficient to cover the appreciation of investors’ principal.
Instead of notifying investors, the respondents in the case falsely claimed that DeFi Money Market had bought car loans that they displayed on DeFi Money Market’s website, the SEC said.
But while the respondents controlled another company that owned car loans, DeFi Money Market never acquired an ownership interest in any of those loans.
The order noted that the respondents used personal funds and funds from the other company they controlled to make principal and interest payments for mToken redemptions.
The SEC found that the digital token sales constituted an unregistered securities offering and violated antifraud provisions of Securities Act and the Securities Exchange Act.
Without admitting or denying the findings in the SEC’s order, Keough and Acree consented to a cease-and-desist order forcing them to pay $12,849,354 and penalties of $125,000 each.
Before the issuance of the SEC order, the respondents had funded the smart contracts so that mToken holders could redeem their mTokens and receive all principal and interest owed.
The SEC described the order as the first enforcement case involving decentralised finance, which uses smart contracts on blockchains, typically Ethereum, to offer traditional financial instruments without the need for financial intermediaries such as banks, brokerages or exchanges.
“The federal securities laws apply with equal force to age-old frauds wrapped in today’s latest technology,” said Daniel Michael, chief of the SEC Enforcement Division’s Complex Financial Instruments Unit in a press release. “Here, the labelling of the offering as decentralised 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.”