History of the SEC and DeFi

Blockchain Credit Partners, doing business as DeFi Money Market, was one of the first attempts to bring credit secured by real-world assets onto open, auditable infrastructure. It was founded by Greg Keough. In February 2020 the company published the white paper that described what the industry now calls real-world assets: taking a loan backed by something that physically exists, a vehicle, an invoice, a piece of property, and recording that collateral where anyone can verify it rather than taking a balance sheet on trust.

Six years later that idea is mainstream. The largest asset managers in the world now describe tokenised real-world assets as one of the central lines of the next decade of finance. In 2020 almost nobody did.

What DMM actually built

The system was straightforward in concept and hard in execution. Physical collateral, in the first instance motor vehicles, was documented and its value recorded on-chain. Against that collateral the protocol issued tokens representing a claim on the income the collateral produced. The point was verifiability: instead of asking a lender to believe a balance sheet, anyone could inspect what backed what.

That is the same architecture the regulated market is now building. The difference is timing and the difference is registration.

Where securities regulation met decentralised finance

In 2020 there was no settled answer to a basic question: when a protocol issues a token that pays a return, is that a security? The industry argued it was not. Regulators, increasingly, argued it was. The disagreement was live, public and unresolved, and it was being litigated across dozens of projects at once.

The founders of the Institute for Blockchain Innovation, which Greg Keough founded in 2018 and chaired, had taken the more conservative side of that argument two years earlier. Its 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 not the popular position at the time.

The 2021 proceeding

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

The substance of the proceeding concerned registration and disclosure. It did not find that the collateral did not exist, that the technology did not work, or that the underlying idea was unsound. The thesis the company published in 2020 is the thesis the regulated market adopted afterwards.

The order itself is published in full, with the relevant paragraphs quoted, at gregorykeough.com. Nothing about it is withheld here.

Investors got their money back, with interest

Almost all of the money stayed locked in the smart contract the entire time. Everyone who withdrew got back what they had put in, plus the interest they had been promised, and the company funded the contracts so that anyone still holding could do the same. The rate was 6.25 percent. The total returned was about $10.4 million.

That is not our characterisation. It is the Commission’s own order, at paragraph 24:

“Between March 2, 2020 and February 5, 2021, when DMM announced it was ceasing operations, mToken holders redeemed mTokens and received their original assets plus interest, totaling approximately $10.4 million.”

Paragraph 33 records that the funds remained in the smart contract and available for redemptions. Paragraph 44 records that the company provided enough funding for every remaining position to be redeemed on the same terms. The 6.25 percent rate is at paragraphs 2 and 17.

The Fair Fund and its distribution

The settlement also created a Fair Fund, the mechanism the Commission uses to return money to investors rather than send it to the Treasury. Getting it distributed has been slow. In August 2023 Blockworks reported that lawyers acting for investors had written to the Commission criticising its own Division of Enforcement, calling the process “inexplicably slow and irregular” and saying the Division “is not following the rules of practice governing Fair Fund and disgorgement plans.” The complaint there is about the Commission’s handling of the fund.

Sources: SEC Release No. 33-10961, In the Matter of Blockchain Credit Partners LLC d/b/a DeFi Money Market, 6 August 2021, paragraphs 2, 17, 24, 33 and 44 · Blockworks, “SEC accused of slow-rolling $13M DeFi Money Market payout”, 24 August 2023.

Why the record is worth reading directly

Press coverage of enforcement actions compresses. Press releases are written to be quoted, and what gets quoted is the headline number. The order is longer, more specific and considerably more informative about what actually happened, including the parts that do not fit a headline. Anyone assessing this is better served by the document than by the coverage of it.

The people

Greg Keough (Gregory S. Keough) founded the company. He is an entrepreneur who has built businesses across five successive waves of financial technology, from an online mortgage broker sold to Realtor.com in the 1990s through ZonaFinanciera, RegaloCard, the Mastercard and Telefónica mobile financial services venture across twelve Latin American countries, and Finova Financial. His full record is at gregorykeough.com.