DeFi Money Market operators fined $13 million to settle SEC charges

abdelaziz Fathi

The Securities and Exchange Commission (SEC) has charged three people involved with a DeFi investment scheme for misleading investors concerning the operations and profitability of their Cayman Islands business.

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DeFi Money Market (DMM) was a Decentralized Finance protocol operated by Blockchain Credit Partners, which claims to attempt bringing real-world assets to the DeFi landscape. Much like other DeFi projects, they allowed users to build complicated trades that ran on the Ethereum blockchain, and yield farm by lending their coins as mTokens to earn DMG governance tokens.

However, the SEC says that DMM and its founders, Gregory Keough and Derek Acree, sold the two digital tokens to US investors without registering their illegal $30 million securities offering.

The SEC claims that the offering ran afoul of securities laws because the mTokens and DMG tokens being offered could be considered securities, and thus the principles should have registered with the SEC as broker-dealers.

The project launched in February 2020 with the backing of billionaire venture capitalist Tim Draper, but then announced a sudden and permanent shutdown less than a year after its token launch.

They offered over 6.5% APY on specific staked assets backed by real-world car loans. However, the SEC’s order finds that DMM operatives realized that their business was unable to generate yields to token holders as promised due to the price volatility of the digital assets. Specifically, the profits of income-generating assets were insufficient to cover appreciation of investors’ principal.

Rather than notifying investors of “this roadblock,” the SEC alleges the defendants  misrepresented their business model, including by falsely claiming that DeFi Money Market bought car loans.

“While the respondents controlled another company that owned car loans, DeFi Money Market never acquired an ownership interest in any of those loans. Instead, the order finds 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 further explains.

Furthermore, DeFi Money Market and its owners were charged with facilitating the trade of assets classified as securities without following the required steps outlined by the regulators.

The SEC orders impose financial penalties against the company and include undertakings to compensate harmed investors who purchased tokens in the illegal offerings. Without admitting or denying the allegations, Keough and Acree agreed to disgorge $12.8 million and pay civil penalties of $125,000 each.

“The federal securities laws apply with equal force to age-old frauds wrapped in today’s latest 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,” said Daniel Michael, Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit.

Since the crypto-boom, the SEC has periodically cracked down on a number of fundraising campaigns for fraudulent activity, while continues to warn investors of the potential perils of investing in the nascent sector.

The rapid growth of DeFi has also caught regulators off guard as it extends far beyond cryptocurrencies into insurance, derivatives trading and even savings accounts.

The US derivatives regulator suggested that many DeFi apps could be illegal, and SEC commissioners also singled out the DeFi space as raising “a number of challenges” for investors and regulators

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