The scammers used smart contracts and a supposed DeFi protocol to sell securities without authorization. The SEC ordered them to pay a USD 12.8 million compensation and said they had returned the stolen money.
The US Securities and Exchange Commission (SEC) recently initiated legal action against a company based in the Cayman Islands. The reason for the indictment was a scam for more than USD 30 million related to a decentralized finance (DeFi) business. Finally, the criminals agreed with the authorities to pay a fine and compensate their victims.
The company Blockchain Credit Partners promoted the decentralized finance protocol DeFi Money Market (DMM). The owners of that firm, Gregory Keough and Derek Acree, allegedly sold securities without authorization and provided false information to investors.
The government agency said that it is the first time it has taken action against a securities-based activity using DeFi technology.
Gurbir Grewal, director of the SEC’s Law Enforcement Division, noted that the offering had a label that said decentralized and the securities one that read governance tokens. However, he stated that this did not prevent them from ensuring the immediate closure of DeFi Money Market and the return of funds to investors.
The agency reported that the firm sold securities for more than USD 30 million without authorization between February 2020 and the same month in 2021. The entity detailed that they did so through smart contracts and other so-called DeFi resources, without specifying which ones. Furthermore, the men in question allegedly misled their investors about the operations and profitability of DeFi DMM.
Although they neither admitted nor denied committing those crimes, the defendants promised to suspend their activities and not resume them in the future. They also agreed to pay a compensation of USD 12.8 million and an individual fine of USD 125,000. The SEC reported that the scammers had already returned the stolen funds through smart contracts.
How the Defendants Committed the DeFi Scam
The SEC said that Keough and Acree sold mTokens, which investors could buy through certain digital assets at 6.25% interest. Likewise, they offered DMG governance tokens, which gave creditors voting rights, shares of the profits, and the ability to make resale profitable in the secondary market.
The scammers promised investors to buy assets in the real world to pay their interest with the funds raised. However, the SEC detailed that the volatility of digital assets could cause the gains for real-world assets to be insufficient.
Realizing this obstacle in their operations, the defendants lied to their investors to convince them of their idea. For example, the scammers claimed that DeFi Money Market had acquired auto loans, which they displayed on their website.
Since 2020, decentralized finance platforms have proliferated, becoming fertile ground for such scams. Due to this danger, investors should only trade with widely proven protocols and considerable reputations. One of those responsible for technical support for the DeFi Aave platform gave that explanation in October 2020.
By Alexander Salazar
