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US SEC looks into DeFi offerings, causing DMM to cease operations

2021.02.24 Matthew Lam

Tim Draper-backed DeFi Money Market ceased operation following the U.S. SEC's probe.

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The decentralized finance market dropped in tandem with the crypto market this week, and the total value locked in DeFi protocols declined by 15% on a weekly basis. Despite the drop in TVL, however, total borrowing volumes of DeFi protocols — led by Compound — rose by 31% to reach $9.46 billion.

Similarly, the weekly average trading volume of decentralized exchanges had also risen 13% to reach $2.59 billion, at the time of writing. Uniswap continues to lead DEXs with a 36% market share while Curve replaced Aave as the largest liquidity pool this week, with its total value locked reaching $2.23 billion.

CategoryKey statisticsAmountWeekly % change
OverallTotal value locked (USD)$34.01 billion-15%
Market dominance (%)Maker (16%)
LendingTotal borrowing vol.$9.46 billion31%
Market dominance (%)Compound (42%)
DEXsWeekly avg. trading vol.$2.59 billion13%
Market dominance (%)Uniswap (36%)
Yield farmingLargest liquidity poolCurve ($2.23 billion)
This week, the total value locked dropped while total borrowing volume and weekly DEX trading volumes rose 31% and 13%. Source: DeFi Pulse and DeBank

Tim Draper-backed DeFi protocol ceased operation

DeFi Money Market — a DeFi protocol backed by billionaire Tim Draper — recently announced that it will cease operations following regulatory inquiries from the United States Securities and Exchange Commission.

Established by the DeFi Money Market Foundation, DMM is an asset tokenization protocol allowing users to earn interest in their crypto assets. The protocol launched its public token sale in June 2020 and raised over $6.5 million worth of ETH in less than 48 hours.

According to the official Twitter announcement, DMM received an investigative subpoena from the U.S. SEC on Dec. 15, 2020. The U.S. securities regulator requested information regarding the operation and governance mechanism of the asset token (mTokens) and governance token (DMG tokens), respectively. The SEC staff raised concerns that the public token sales of mTokens and DMG tokens failed to comply with the federal securities law. 

The interest rate of mTokens dropped to zero following the news, and the DMM team stated that the outstanding mTokens and accrued interests are available for redemption. For DMG tokens, the team is developing a token redemption plan to return all available assets to their holders.

SEC continues to crack down on unregistered token offerings

The U.S. SEC has expedited the crackdown on unregistered securities offerings by crypto projects. The most notable crackdown is the ongoing lawsuit between SEC and Ripple, in which the regulator charged the creator of XRP for an unregistered securities offering of $1.3 billion. Earlier in October, the SEC reached a $5 million settlement with Kik Interactive Inc. regarding its unregistered digital "Kin" tokens sale.

The SEC's actions against Ripple, Kik and DeFi Money Market were based on the same rationale — these protocols conducted fundraising in the public market. As noted by Kristina Littman, the chief of the SEC Enforcement Division's Cyber Unit, such fundraising activities may not be exempted from the registration requirements of the federal securities laws.

While DeFi Money Market made an orderly shutdown during the SEC's investigation, it remains unclear whether the SEC will file a lawsuit against the DeFi protocol. The SEC uses the three criteria outlined in the Howey Test to determine whether certain offers are deemed securities:

  1. The investment of money
  2. Common enterprise
  3. Reasonable expectation of profits derived from the effort of others

SEC's probe on DMM may set as a precedent for DeFi tokens

The SEC's probe into the DeFi Money Market protocol may serve as a precedent for other DeFi tokens that have raised funds in the public market. For instance, layer-one DeFi protocol Radix raised $12.7 million in its public token sale in October last year. On the other hand, automated liquidity protocol MoonDeFi is currently conducting its second round of public token sale. While these tokens claimed that the raised funds are used to support their DeFi ecosystem, they may not be able to avoid the registration requirements according to federal securities law.

Fundraising gained popularity among DeFi protocols to scale up their operations. For instance, Nexus Mutual recently raised $2.7 million in the NXM token sale. Compared to Radix and MoonDeFi, it is believed that Nexus Mutual is less likely to be investigated by the SEC, as its token sale is led by private investors such as Collider Ventures.

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