SEC first-ever charges DeFi company for $30 million token fraud

    08 Aug 2021

    The US Securities and Exchange Commission (SEC) charged Cayman Islands-registered DeFi Money Market (DMM) and its two top executives for unregistered sales of more than $30 million of securities using smart contracts and decentralized finance. This is the SEC’s first securities case involving DeFi technology.

    Florida residents Gregory Keough and Derek Acree, along with Cayman Islands-based Blockchain Credit Partners, have been accused of selling unregistered securities through their company DeFi Money Market (DMM) – mTokens that yielded 6.25% interest and governance tokens that offered voting rights and other perks in DMM’s decentralized autonomous organization (DAO) – from February 2020 to February 2021.

    Though DMM was purportedly decentralized, Keough and Acree’s 50/50 leadership split calls the claim into question. Additionally, the SEC’s order indicates that governance token holders had “no role in running DMM’s core business.”

    “The federal securities laws apply with equal force to age-old frauds wrapped in today’s latest technology,” Daniel Michael, a top SEC enforcement official, 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.”

    The DeFi money market fund was supposedly fully backed by real-world assets such as secured auto loans. But while investors were eventually paid in full, the DeFi money market fund was not fully backed and was voluntarily shut down in February.

    The money market fund used smart contracts, via the Ethereum blockchain, to swap crypto investments for the fund’s governance token. These tokens, in turn, acted like ownership shares in the broader project, offering voting rights on where profits were directed.

    But an SEC investigation revealed that the real-world assets, largely loans backed by car liens, ostensibly backing the project were actually owned by a different company, the Florida Finance Company, which the DeFi fund had lent to.

    The SEC alleges that Keough, Acree, and Blockchain Credit Partners misled investors to believe that investor assets would be used to purchase income-generating assets such as car loans to generate returns for token purchases, and, when they realized that token volatility made this impossible, used personal funds and funds from a separate company to make principal and interest payments for the mTokens.

    According to a tweet from DMM’s DAO on Feb. 9th, the company received a subpoena from the SEC in December 2020. Blockchain Credit Partners shut down operations in February and set up a token redemption program that allowed all mToken holders to redeem their tokens for principal and interest owed.

    The respondents agreed to a cease-and-desist order, including disgorgement of $12.8 million and penalties of $125,000 for both Keough and Acree. In addition, Keough and Acree will be unable to participate in any offering of digital asset security for five years.

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