SEC Charges Another DeFi Platform, Insists Projects Can’t Hide Behind ‘Decentralization’

The United States Securities and Exchange Commission (SEC) announced Wednesday that it has reached an agreement to settle previously unannounced charges against Rari Capital, a decentralized finance (DeFi) platform.

The regulator alleged that Rari Capital and co-founders Jai Bhavnani, Jack Lipstone, and David Lucid misled investors and that the platform served as an unregistered broker. Rari Capital’s platforms held more than $1 billion worth of assets at one point, the SEC said.

“We allege that Rari Capital and its co-founders misled investors about both the features and profitability of certain of the crypto asset investments Rari Capital offered, and acted as unregistered brokers,” said Monique C. Winkler, Director of the SEC’s San Francisco Regional Office, in a release.

“We will not be deterred by someone labeling a product as ‘decentralized’ and ‘autonomous,'” she continued, “but instead will look beyond the labels to the economic realities, as we did here, and hold the individuals behind crypto products and platforms accountable when they harm investors and violate the federal securities laws.”

The SEC’s case against Rari parallels previous actions against other crypto firms, in that it struck at the heart of a novel sector—here, DeFi—while also carefully selecting a target that appears to have egregiously violated standard business practices. 

Here, for example, the SEC alleged that Rari claimed to run automated earn pools that instead were run manually in secret, and that the company sometimes failed to operate. The agency also accused Rari of advertising a certain yield percentage for earn pool users that often turned out to be inaccurate, and said the earn pools sometimes lost users’ money.

Rari Capital and the founders did not admit or deny the SEC’s allegations, but agreed to various penalties including “permanent injunctions, conduct-based injunctions, civil penalties, disgorgement with prejudgment interest, and equitable officer-and-director bars against the co-founders for a period of five years.” Furthermore, Rari Capital Infrastructure agreed to a cease-and-desist order as part of the settlement.

But today’s settled charges, crucially, also include language that applies to most DeFi protocols, regardless of their business practices. The SEC’s action categorized two types of tokens commonly used by DeFi projects, here used by Rari—a protocol-specific token issued to represent stakes in token pools, and a governance token offering holders a say in the operation of the platform—as illegally unregistered securities.

Earlier this year, the major U.S.-based DeFi protocol Uniswap revealed that it had received notice of an impending SEC lawsuit.

The latest SEC action came less than two days after former president Donald Trump and his business partners publicly announced that their upcoming DeFi platform, World Liberty Financial, will soon begin offering sales of a governance token, though one that will be non-transferable.

Edited by Andrew Hayward

Editor’s note: This story was updated after publication with additional details.