The US Securities and Exchange Commission (SEC) has charged the lender DeFi Money Market for raising $30 million through fraudulent offerings in what it says is the agency’s “first” one involving securities using DeFi technology.

However, as SEC Commissioner Hester Peirce clarifies, it was an “enforcement action against a DINO (decentralized in name only) project.”

According to the SEC’s press release, the SEC has charged two Florida men Gregory Keough and Derek Acre, and their Cayman Islands company Blockchain Credit Partners for selling unregistered securities for more than $30 million through DeFi Money Market from February 2020 to February 2021.

Both the tokens offered and sold as investment contracts violated the Securities Act, said the SEC.

The agency said they used smart contracts to sell two types of digital tokens — one was mTokens, on which they paid 6.25% interest, and the other was the governance token DMG.

In offering and selling these tokens, Keough and Acre misled investors about the operations and profitability of their business DeFi Money Market, it said.

The SEC said the operators of the business planned to pay the interest and profits to their investors by using their assets to buy “real world” assets that generate income like car loans which were owned by another company of the respondents but were never acquired by DeFi Money Market.

The respondents actually used personal funds and funds from the other company they controlled to make principal and interest payments for mToken redemptions. But DeFi Money Market could not operate as promised because of crypto volatility, making it insufficient to cover appreciation of investors’ principal and never notified their investors of the same.

“The labeling of the offering as decentralized and the securities as governance tokens did not hinder us from ensuring that DeFi Money Market was immediately shut down and that investors were paid back,” said Daniel Michael, Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit.

Respondents have agreed to a cease-and-desist order and pay penalties of $125,000 each without admitting or denying the findings.

“Pretty sure this is the first SEC action holding ‘governance tokens' per se to be securities,” said Gabriel Shapiro, general counsel at Delphi Labs, who noted that SEC is seeing APYs/APRs are “promises” and “now broadening its approach to encompass tokens-as-debt-securities for DeFi” as well.

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