The US Securities and Exchange Commission (SEC) has charged two men and their Cayman Islands-based company for unregistered sales of over $30m of securities through smart contracts and decentralised finance (DeFi) technology.
The regulator claims the Florida-based men are charged with misleading investors around the operations and profitability of their business DeFi Money Market.
It also alleges that Gregory Keough, Derek Acree, and their company Blockchain Credit Partners, offered and sold securities in unregistered offerings through DeFi Money Market between February 2020 and February 2021.
The SEC suggests they used smart contracts to sell two types of digital tokens. The first was mTokens, which could be bought with specific digital assets and paid 6.25% interest.
The second asset was MGS, which were governance tokens that could give holders certain voting rights, a share of excess profits and the ability to profit from DMG governance token resales in the secondary market.
In its order, the regulator claims that in selling mTokens and DMG token, the defendants claimed DeFi Money Market could pay interest and profits because it would use investor assets to buy real world assets that generate income, such as car loans.
However, the SEC claims DeFi Money Market could not operate as claimed as the price volatility of the digital assets used to purchase tokens created risk that income generated through income-generating assets would not cover appreciation of investors’ principal.
It claims that instead of notifying investors of this issue, the respondents misrepresented how the company operated, including falsely claiming DeFi Money Market had bought car loans that were then displayed on DeFi Money Market’s website.
The SEC said the defendants used their personal funds and funds from their other company to pay the principal and interest payments for mToken redemptions.
Without admitting or denying the findings of the SEC’s order, the respondents consented to a cease-and-desist order, which included a disgorgement totalling $12.8m and penalties of up to $125,000 each.
Daniel Michael, chief of the SEC enforcement division’s complex financial instruments unit, said, “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.”
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