The United States Securities and Exchange Commission (SEC) has charged two men, Gregory Keough and Derek Acree, and their company for unlawful sales of more than $30 million worth of securities. These Florida men allegedly used smart contracts and a so-called “decentralized finance” (DeFi) technology to facilitate the act.
Between February 2020-21, Keough and Acree, along with their company Blockchain Credit Partners, misled investors concerning the operations and profitability of their business in the DeFi Money Market. The SEC discovered that during this period, these Florida men used smart contracts to sell two types of digital tokens: mTokens and DMG “governance tokens”.
According to the SEC’s order, Keough and Acree thought that by selling these tokens, DeFi Money Market could pay their investors interest as well as their profits because it would use the investors’ securities to buy “real world” assets such as car loans that generated income.
They however later discovered that the DeFi Money Market could not function as expected because the amount of money generated through income-generating assets would not be enough to cover the rise in the value of their investors’ principal.
But instead of informing their investors about this impediment, they decided to deceive them by misrepresenting how their Cayman Island-based company was operating.
To encourage their investors, Keough and Acree falsely claimed that DeFi Money Market had bought the car loans that they displayed on DeFi Money Market’s website when in the real sense, the car loans were owned by another company that they operated. In all, they were able to sell about $30 million worth of securities and profit from it.
Following investigations and settlements the alleged fraudsters were handed a cease-and-desist order that included a mandated repayment of about $12.8 million so that their investors could redeem both their principal and their interest money. They have also each been given payment penalties of $125,000.
The current development marks the first time that the U.S. SEC has clamped down on a “DeFi” project, and suggests that the regulator has turned its attention to the sector. Earlier this week, SEC Chair Gary Gensler named DeFi among the key crypto sectors that are on their radar for increased regulation.
