SEC Brings Its First DeFi Securities Case Against DeFi Money Market

The U.S. Securities and Exchange Commission on August 6, 2021 instituted and simultaneously settled cease-and-desist proceedings against Blockchain Credit Partners, doing business as DeFi Money Market, and founders Gregory Keough and Derek Acree. The agency said it was its first case involving securities offered through decentralized-finance technology.

The order covered two token products sold from February 2020 through February 2021. According to the SEC’s findings, the respondents sold approximately $17.7 million of mTokens and more than $13.9 million of DMG tokens to the public, including U.S. investors. Those figures imply at least $31.6 million across the two categories, although the order describes the aggregate more conservatively as more than $30 million.

What the SEC found

DeFi Money Market marketed mTokens as accruing 6.25% annual interest. Investors could deposit specified digital assets, including Ether, Dai or USD Coin, into smart contracts and receive mTokens. The project said deposited assets would finance income-producing “real world” assets, such as vehicle loans, whose returns would cover interest owed to mToken holders.

DMG tokens were presented as governance tokens carrying voting rights, a claimed share of excess profits and possible gains from secondary-market resale. The order said governance holders could vote on some proposals, but did not run the core business of identifying, buying and servicing loans.

The SEC found that the business had working smart contracts and token infrastructure, but did not operate as represented. The vehicle loans displayed on DeFi Money Market’s website belonged to another company controlled by Keough and Acree; DeFi Money Market never acquired an ownership interest in them. The order said personal funds and funds from that other company were used to meet mToken principal and interest redemptions.

These are findings in a settled administrative order. Keough, Acree and the company consented without admitting or denying the findings, apart from admitting the SEC’s jurisdiction and the proceeding’s subject matter. The findings were expressly not binding on any other person or entity.

The securities-law line

The Commission classified mTokens as notes and as investment contracts. It classified DMG tokens as investment contracts, reasoning that purchasers were led to expect profits from the respondents’ managerial efforts and work to support a secondary market. The order found unregistered-offering violations under Sections 5(a) and 5(c) of the Securities Act, along with antifraud violations under federal securities laws.

That analysis made the case important beyond one failed project. The SEC evaluated the economic arrangement rather than accepting labels such as “governance token” or “decentralized.” The result did not establish that every DeFi token was a security. It did show that smart-contract distribution and limited token-holder voting did not, by themselves, remove an offering from existing securities law.

The timing reinforced that message. In an August 3, 2021 speech, SEC Chair Gary Gensler said crypto lending and DeFi platforms could implicate securities, commodities and banking laws, while noting that a token’s status depended on its facts and circumstances. The August 6 order supplied a concrete enforcement example, although Gensler’s speech stated his own views and was not itself a Commission rule.

Settlement and limits

The respondents agreed to cease and desist. The order imposed $12,849,354 in disgorgement, $258,052 in prejudgment interest and civil penalties of $125,000 on each founder—a calculated total of $13,357,406. Keough and Acree also accepted five-year restrictions on participating in digital-asset securities offerings and serving as officers or directors of certain reporting issuers.

Prior to August 6, 2021, the respondents had funded the smart contracts so mToken holders could redeem principal and interest owed. That remediation did not erase the SEC’s registration and antifraud findings, but it matters when assessing investor harm. The August 6 action was a settlement, not a judicial ruling after contested litigation, and its direct legal conclusions applied to the products and facts described in the order.