On August 6, 2021, the Securities and Exchange Commission (SEC) filed a cease and desist against the DeFi (Decentralized Finance) Money Market.
Florida residents Gregory Keough and Derek Acree and their offshore company, Blockchain Credit Partners, were charged with selling “more than $30 million of securities in unregistered offerings by using smart contracts and ‘decentralized finances' (DeFi) technology to sell digital tokens.”
Additionally, they “made materially false and misleading statements concerning operations and profitability of DeFi Money Market.”
Who and What is Blockchain Credit Partners/DeFi Money Market?
Blockchain Credit Partners, d/b/a DeFi Money Market (DMM), is an offshore Cayman Islands corporation formed in July 2019. It was co-founded by Gregory Keough and Derek Acree, who both own 50% of the company and reside in Florida.
The company and all its transactions were not registered with the SEC which provided a basis for the cease and desist.
What is Decentralized Finance?
Decentralized Finance is a system that aims to eradicate the middleman when it comes to investing. To understand the significance of this case, it's important to dive into Decentralized Finance. When financial products are sold on a public blockchain network to which anyone has access, it's known as DeFi. It eliminates the need to go through a bank or brokerage to obtain financials. Providing any official form of identification, such as ID or SSN, is not required.
How DeFi Money Market Managed Investments
DeFi Money Market sold two types of tokens: mTokens that could accrue 6.25% interest, and DMG tokens which gave buyers “certain voting rights, a share of excess profits, and the ability to profit from DMG resales in secondary markets.”
The SEC explains that
“DeFi Money Market could pay investors 6.25% interest on digital assets because it would use investor assets to buy ‘real world' assets, like car loans, that would generate sufficient income to pay the promised interest and generate surplus profits.”
DeFi Money Market sold $17.7 million in mTokens and over $13.9 million in DMG tokens to the public. But when Keough and Acree realized they would not be able to pay investors the interest promised, they began to intentionally misrepresent their investment strategy.
Why Was This Unlawful?
Keough and Acree “fundamentally misrepresented how they operated DMM and portrayed their vision as executed action.” DMG tokens were classified as securities, which are “fungible, negotiable financial instruments that hold some type of monetary value.”
Investors bought into these tokens under the expectation that proceeds would go into operating the DMM business and that profits would be shared between DMG investors.
However, DeFi Money Market was selling these securities without having a “registration statement filed or in effect with the Commission (SEC) or qualifying for an exemption from registration with the Commission.”
DeFi Money Market violated the Securities Act in part because it failed to involve the SEC in its processes, thereby creating an unofficial transaction.
One of the main issues here is that Keough and Acree were improperly obtaining assets worth millions “which they used for their own personal benefit.”
They not only held on to these funds, but they also used them to bolster the secondary trading market that promised profit to DMG investors – they paid trading platforms to list the tokens and bought into them using Decentralized Finance.
Additionally, they “made it appear as though assets owned by DMM generated enough income to pay mToken holders 6.25% interest” by using personal funds and borrowed money.
All in all, Keough and Acree were running a fraudulent operation that took advantage of Decentralized Finance and hopeful investors to earn capital, almost as if it were a Ponzi scheme.
They owe the SEC $12,849,354 in remedies and prejudgment interest of $258,052, as well as $125,000 each in civil money penalty.
Keough and Acree “engaged in a course of conduct that deceived prospective investors during their offers and sales of mTokens and DMG tokens.”
There were many things that went wrong here. For one, they did not invest in car loans as they promised. Instead, they took $8.9 million in loans from the Florida Finance Company and publicly misrepresented where the money was being invested.
They “personally funded payments to redeeming mToken holders to make it appear that DeFi Money Market assets generated interest.” Keough and Acree also fully knew that their actions were deceptive.
In this case, the SEC was doing its due diligence to control Decentralized Finance as its a relatively new system within the blockchain. They are now investigating DeFi transactions.
Download the SEC Order here.