Key Insights:
- An ex-SEC official blasts the agency’s enforcement focus amid Rari Capital’s recent settlement charges.
- Rari Capital faced SEC charges over unregistered activities and misleading investors about autonomous management.
- SEC’s “whack-a-mole” enforcement was criticized for creating uncertainty in the evolving digital asset industry.
A former U.S. Securities and Exchange Commission (SEC) official has raised concerns over the agency’s regulatory approach to digital assets following the settlement with Rari Capital. The decentralized finance (DeFi) platform settled charges with the SEC related to misleading investors and engaging in unregistered activities.
Rari Capital Settles Charges Over Misleading Investors
The SEC announced that it had settled charges with Rari Capital and its co-founders for misleading investors and unregistered broker activities. Rari Capital, known for offering yield-bearing services through its Earn and Fuse pools, was found to have misrepresented its operations. The SEC stated that the platform’s Earn pools, advertised as being able to manage and rebalance investments autonomously, actually required manual intervention, contradicting the claims made by Rari.
Additionally, the SEC accused Rari’s co-founders—Jai Bhavnani, Jack Lipstone, and David Lucid—of conducting unregistered broker activities related to the firm’s operations. At its peak, Rari Capital held over $1 billion in assets. As part of the settlement, the co-founders agreed to cease engaging in activities that violate securities laws but did not admit or deny the charges.
Ex-SEC Official Critiques SEC’s Enforcement Approach
Michael Liftik, a former SEC official and current partner at law firm Quinn Emanuel, criticized the agency’s strategy regarding crypto regulation. Liftik emphasized the SEC’s focus on enforcement actions instead of creating clear guidelines for the rapidly evolving digital asset sector. His comments have fueled ongoing debates about the SEC’s regulatory methods.
Suggesting that the agency’s methods make it challenging for companies in the digital asset space to understand and comply with regulations, Liftik stated,
“The SEC’s approach seems to focus on enforcement without providing clear regulatory guidance.”
He described the SEC’s strategy as a “whack-a-mole” approach, where firms are targeted individually rather than through comprehensive regulation. This, according to Liftik, has led to uncertainty and confusion among companies seeking to adhere to legal requirements.
A memorable line from Michael Liftik, partner at law firm @quinnemanuel and a former senior @SECGov employee, from today’s @FinancialCmte hearing:
“The SEC has refused to issue new rules or meaningful guidance relating to digital assets and, at the same time, has engaged in… https://t.co/ZTCxly1ViG
— Eleanor Terrett (@EleanorTerrett) September 18, 2024
The SEC has faced criticism from various stakeholders in the crypto industry who argue that the lack of clear regulatory frameworks hampers growth and innovation. Despite the criticism, the agency continues to scrutinize both centralized and decentralized finance platforms, reinforcing that the classification of a platform as decentralized does not exempt it from securities laws.
Rari Capital’s Troubles Compounded by Major Hack
Rari Capital’s legal issues come in the wake of a major security breach in May 2022, when its Fuse borrowing and lending platform was exploited, resulting in the loss of $80 million. This hack forced Rari Capital to halt new deposits and begin the winding-down process of its operations, eventually leading to the platform’s shutdown.
The SEC acknowledged Rari’s efforts to cooperate during the investigation, including returning performance-based fees to affected users and taking remedial actions in response to the hack. The settlement with Rari Capital Infrastructure LLC, the entity that assumed control of the platform post-hack, included an agreement to refrain from violating securities laws in the future.
Growing Regulatory Divide Over Crypto in the U.S.
The SEC’s actions against Rari Capital come amid a broader debate in Congress over how digital assets should be regulated. Lawmakers are increasingly divided on the issue, with some viewing crypto regulation as a partisan topic. A memo circulating in Congress indicates that some Democratic leaders are positioning crypto as aligned with “extreme MAGA Republicans,” reflecting the growing political divide on the issue.
This divide is against ongoing efforts to craft comprehensive legislation, such as the FIT 21 bill, which aims to modernize securities laws and classify digital assets. Proponents of stricter regulation argue for enhanced investor protections, while critics believe that current regulatory approaches stifle innovation in the digital asset space.
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