The U.S. Securities and Exchange Commission (SEC) has charged decentralized finance (DeFi) protocol Lari Capital and its executives with defrauding investors and operating as an unregistered broker-dealer.
The Wednesday agreement includes a variety of relief measures, a limited injunction and a cease-and-desist order subject to court approval.
SEC sues DeFi protocol Larry Capital
According to the filing, the regulator’s charges against the now-defunct DeFi protocol stem from its misleading investors and operating as an unregistered broker-dealer. Larry launched two investment products, Yield Pool and Fuse Pool, which operated as cryptocurrency investment funds that allowed investors to generate income. At their peak, these products handled over $1 billion in crypto assets.
The SEC claims that Lari deceived investors about the revenue pool returns. They said that they would automatically rebalance assets to the best return opportunities. This often required manual intervention, but Lari Capital often failed to initiate this. They also advertised high annual percentage yields (APY) to lure investors without disclosing some fees. As a result, some revenue pool investors lost money.
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The charges also extend to co-founders Jai Bhavnani, Jack Lipston and David Lucid. The regulator alleges that the three executives engaged in unregistered broker-dealer activities. Lari Capital Infrastructure LLC, which acquired the platform in 2022, was also cited for unregistered securities offering and broker-dealing activities.
“We allege that Lari Capital and its co-founders misled investors about the features and profitability of the cryptocurrency asset investments that Lari Capital offered, and acted as an unregistered broker-dealer. We will not be deterred by labels that say a product is decentralized and autonomous. Instead, we will look beyond the labels, as we have done here, to the economic realities, and hold the individuals behind cryptocurrency products and platforms accountable when they harm investors and violate federal securities laws,” reads an excerpt from the official SEC press release .
The terms of the settlement between the SEC and Lari Capital include a permanent injunction, civil penalties, disgorgement with interest, and a five-year ban on the co-founders from acting as officers or directors. The SEC also imposed a cease and desist order, which Lari agreed to, but did not admit or deny the regulator’s findings. The settlement is subject to court approval.
The Impact of the Larry Collapse and SEC Charges on DeFi
Launched in 2020 to provide automated yield farming, Lari Capital has gradually risen through the ranks. The DeFi protocol has surpassed $1 billion in total valuation by 2021 thanks to its high-yield liquidity pools.
However, the company was plagued by challenges, which eventually led to its collapse. In 2021, Lari lost about $11 million due to integration issues with Alpha Finance.
In 2022, the company suffered another major heist, this time when bad actors used a re-entrancy bug to lose over $80 million from the Fuse pool. The re-entrancy bug also affected several other DeFi protocols, including Babylon Finance, which also shut down.
“Babylon Finance is shutting down. Despite our efforts, we were unable to reverse the negative trends resulting from the Larry hack. The markets did not help either,” Babylon Finance founder Ramon Requero said at the time .
The SEC’s action underscores the regulator’s ongoing efforts to regulate decentralized finance platforms, which inadvertently represent what they believe to be outside of traditional regulatory frameworks.
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The implications of this agreement are therefore significant for the DeFi sector. They reflect broader themes in the regulatory environment, including investor protection, operational challenges, legal and compliance considerations, and regulatory oversight.
