The US Securities and Exchange Commission has launched probes into the practices of multiple crypto lending platforms, including DeFi platforms developed by Coinbase Global and Uniswap Labs, reinforcing its position that crypto assets are securities in certain instances.
Coinbase, in response, announced last week that it won’t offer its planned crypto lending program. Coinbase Lend would have allowed customers holding a stablecoin called USD Coin to lend their coins out to other cryptocurrency traders and earn interest. USD Coin is pegged to the US dollar.
Regulatory concerns about decentralized finance (DeFi) platforms and crypto markets overall have created a new dimension of securities law compliance that whistleblowers can help safeguard by reporting detailed information about manipulation or any other securities law violations through the SEC whistleblower program.
As the popularity of DeFi platforms – such as those developed by Coinbase and Uniswap Labs – grows, so has the SEC’s interest in pursuing cases against them to ensure that the companies behind them follow securities laws regarding public disclosures as well as registration of investment offers involving securities.
The SEC argues that crypto coins are an asset and that the lending programs used in decentralized finance securitize the crypto coin, putting them squarely in its regulatory purview.
SEC Chair Gary Gensler said recently in an interview that the SEC wants to make sure crypto companies and advocates of cryptocurrencies are not “misleading the public, they’re not manipulating the public, manipulating the markets.”
Recent SEC enforcement efforts in the crypto industry
The SEC filed its first DeFi case Aug. 6. It charged two Florida men and their Cayman Islands company, Blockchain Credit Partners, for unregistered sales of more than $30 million of securities using smart contracts and DeFi technology, and for misleading investors concerning the operations and profitability of their business, DeFi Money Market.
Earlier this month, Coinbase said in a blog post that the SEC sent the company a Wells notice warning that it intended to take civil enforcement action over its proposed Coinbase Lend program. The SEC considers Coinbase Lend to involve a security and so it must be registered under investor protection laws.
Coinbase disputed that. But it announced Sept. 17 that it had decided not to launch the crypto lending program.
The SEC also is investigating Uniswap Labs, the startup behind Uniswap, one of the world’s biggest decentralized cryptocurrency exchanges. The Wall Street Journal reports that trading on Uniswap generated more than $1 billion in fees through August. It’s the first decentralized finance protocol to achieve this significant milestone in fees generated, according to industry analysts.
Last year, Uniswap distributed a digital token called UNI, which gives holding users governance and voting rights over the future of the Uniswap protocol, including the fees involved. Because a significant share of UNI tokens were distributed to Uniswap Labs employees and investors, the SEC is concerned that it may be possible for insiders to snag massive windfalls based on non-public knowledge, which would violate laws against insider trading.
Whistleblowers can report cryptocurrency fraud and earn SEC and CFTC rewards
Crypto industry insiders are well positioned to discover and reveal cryptocurrency fraud. The SEC and CFTC welcome crypto whistleblowers and offer rewards and protection against job retaliation.
If SEC or CFTC sanctions in an enforcement action due to whistleblower information exceed $1 million, whistleblowers will be awarded 10% to 30% percent of the amount collected.
Whistleblowers who are fired or suffer harassment, demotion or other forms of reprisal can sue for reinstatement, double back pay and any other damages that occurred. SEC whistleblowers must have reported their allegations of violations to the SEC before the retaliation occurred.
The SEC and CFTC is legally bound to keep whistleblowers’ identities confidential, with rare exceptions.
The SEC has awarded over $1 billion to 212 whistleblowers since issuing its first whistleblower award in 2012. As of last April, information and assistance provided by SEC whistleblowers have enabled the SEC to bring successful enforcement actions that resulted in orders for more than $3.1 billion in sanctions.
The CFTC has awarded approximately $123 million to whistleblowers, whose information has led to CFTC enforcement actions that now have totaled over $1 billion in monetary sanctions.
If you are aware of fraud and other securities law violations by DeFi developers or others in the crypto industry, contact us for a free, confidential review of your matter by experienced SEC and CFTC whistleblower attorneys.
About the author
Phillips & Cohen is the most successful law firm representing whistleblowers, with recoveries from our cases totaling over $12.8 billion. We have been recognized for our work by numerous national awards. Our attorneys and cases have been in The New York Times, The Wall Street Journal, the Financial Times and other news media. Three of our cases were featured in the CBS series, “Whistleblower.”
Phillips & Cohen’s roster of whistleblower attorneys includes Sean McKessy, the former founding Chief of the SEC Office of the Whistleblower, and Erika Kelton, who has won eight awards under Dodd-Frank whistleblower programs for Phillips & Cohen clients – including an SEC award that exceeded $32 million, which was the largest SEC award to an international whistleblower. Contact us.