Part Three: The Challenge, the SEC Proceeding, and What the Idea Became

Every early system meets the problem it did not design for. For DeFi Money Market, that problem was volatility.

The Commission’s own order describes it plainly: the team realised that their model of using digital assets to purchase income-generating assets faced a significant obstacle, namely how to account for fluctuations in the value of the digital assets themselves. The physical collateral generated enough income to pay interest. What it could not do was cover the appreciation of investors’ principal if the price of a volatile digital asset such as Ether rose sharply.

That is a real engineering problem and it is worth stating clearly, because it is the kind of problem that only appears once a system is running.

The 2021 proceeding

In August 2021 the Securities and Exchange Commission instituted a settled administrative proceeding concerning Blockchain Credit Partners and DeFi Money Market. It was resolved by consent, without admitting or denying the findings, which is the ordinary form for a settled Commission matter.

What the proceeding turned on was registration and disclosure. In 2020 there was no settled answer to whether a token that pays a return is a security. The industry argued one way, regulators increasingly argued the other, and the question was being contested across dozens of projects simultaneously. The order did not find that the collateral did not exist, that the technology did not function, or that the underlying idea was unsound.

Read the order rather than the coverage of it. Press releases are written to be quoted and what gets quoted is a headline figure. The document itself is longer, more specific and considerably more informative. It is published in full at sec.gov, and it is quoted and annotated paragraph by paragraph at gregorykeough.com.

What the idea became

The white paper DMM published in February 2020 described taking credit secured by things that physically exist, beginning with vehicles, and recording that collateral on open infrastructure where anyone could verify it. At the time almost nobody was building that.

Six years later the largest asset managers in the world describe tokenised real-world assets as a central line of the next decade of finance. The architecture the regulated market is now assembling is recognisably the same architecture. The thesis was early. The registration was the part that had to be settled.

The position taken two years earlier

It is worth noting that in 2018, two years before any of this, Greg Keough founded and chaired the Institute for Blockchain Innovation, whose founding proposal, drafted with the law firm Cooley LLP, was that token offerings should be brought inside the registration requirements of the securities laws rather than structured around them. That was the minority position at the time. It is the consensus now.

Sources: this article draws on public sources and on the Securities and Exchange Commission’s own administrative order, In the Matter of Blockchain Credit Partners LLC d/b/a DeFi Money Market, Release No. 33-10961 (6 August 2021).