SEC Charges Crypto Execs For Allegedly Fraudulent $30 Million Offerings In First Case Against This Booming $100 Billion Space



After warning this week of enhanced regulatory scrutiny to come, the Securities and Exchange Commission on Friday levied its first charges in the booming decentralized finance space, charging two Florida men and their Cayman Islands company for allegedly selling more than $30 million of securities to investors in unregistered offerings over the course of a year.

“Make no mistake: If a lending platform is offering securities, it falls into SEC jurisdiction,” SEC … [+] Chair Gary Gensler warned Tuesday.

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Key Facts

The agency alleges that between February 2020 and February 2021 two executives of Blockchain Credit Partners used smart contracts on the Ethereum blockchain to sell two types of cryptocurrencies while misleading investors about the operations and profitability of their business.

According to the Friday order, the company allowed investors to purchase one of the cryptocurrencies using popular digital assets like ether and promised to pay holders nearly 6.3% interest, claiming investor funds would be used to buy “real-world” assets, such as car loans, that generated income.

Instead the SEC claims it was impossible for the business to operate as promised because the real-world assets couldn’t generate enough income to pay back the surging value of investments made in tokens like ether. 

Executives failed to notify investors of the roadblock, the SEC alleges, and instead used personal funds and funds from another company they controlled to make principal and interest payments to investors.

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Blockchain Credit Partners and executives Gregory Keough and Derek Acree didn’t admit or deny the SEC’s findings, but agreed to pay back more than $12.8 million in disgorgements and penalties of $125,000 each.

Crucial Quote 

“The federal securities laws apply with equal force to age-old frauds wrapped in today’s latest technology,” Daniel Michael, a unit chief of the SEC’s enforcement division, said in a Friday statement. “Here, the labeling of the offering as decentralized and the securities as governance tokens did not hinder us from ensuring that [the lending marketplace] was immediately shut down and that investors were paid back.”

Key Background

Just days before the charges, SEC Chair Gary Gensler said booming decentralized finance platforms, which are also known as DeFi, were one of the facets of the cryptocurrency industry that warranted more government scrutiny. The platforms largely sidestep traditional intermediaries like central banks and exchanges for financial services and instead rely on blockchains—and often their own cryptocurrencies—to process transactions. On Tuesday, Gensler said Tuesday, such practices can not only implicate securities laws, but also commodities and banking laws. “Make no mistake: To the extent that there are securities on these trading platforms, under our laws they have to register with the Commission unless they meet an exemption,” he warned, adding: “Make no mistake: If a lending platform is offering securities, it also falls into SEC jurisdiction.” Meanwhile, institutional investors have largely been warming up to the space: Goldman Sachs last week filed to create its own exchange-traded fund investing in DeFi. 

Big Number

$101 billion. That’s the current market value of DeFi, according to crypto-data website CoinGecko. The space shot past a $100 billion valuation for the first time ever and peaked at about $150 billion in May before the broader crypto market crashed nearly 50%. 

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Further Reading

Ethereum Spikes After New Upgrade As Its Crypto Market Dominance Gains An Edge On Bitcoin (Forbes)

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Author: Jonathan Ponciano, Forbes Staff

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