Ex-SEC Official Blasts US SEC Amid Rari Capital Settlement Charges

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As a seasoned legal professional with extensive experience in the securities industry, particularly within the SEC, I find myself deeply concerned about the current state of digital asset regulation. Having worked under the SEC and now as a partner at Quinn Emanuel, I’ve witnessed firsthand the agency’s approach to enforcement actions against firms in the sector, while seemingly reluctant to issue clear guidelines or engage in rulemaking.

A former SEC officer has expressed worries about the regulatory agency’s strategy towards cryptocurrencies, aligning with a recent agreement concerning the decentralized finance platform, Rari Capital.

Michael Liftik, a former SEC official now with law firm Quinn Emanuel, highlighted the SEC’s hesitancy to provide definite regulations for digital assets, even as they take action against companies operating within this field. These comments have ignited renewed discussions about the SEC’s regulatory approach in this area.

Rari Capital Settlement with the SEC

The Securities and Exchange Commission (SEC) has confirmed that it has reached an agreement with Rari Capital and its founders regarding allegations made against them. This Decentralized Finance (DeFi) platform, providing yield-earning opportunities to cryptocurrency investors, was accused of deceiving investors and participating in unregistered brokerage activities.

It was discovered that Rari Capital’s Earn pools, advertised as self-managing investment solutions, actually necessitated human intervention, which goes against their stated claims.

The agreement encompassed actions pertaining to Rari’s Fuse pools as well. The regulatory body announced that co-founders Jai Bhavnani, Jack Lipstone, and David Lucid had been engaged in broker activities without proper licensing. At its highest point, this platform managed assets worth more than a billion dollars. Neither Rari Capital nor its officials acknowledged or denied the allegations; however, they consented to abide by securities laws in the future, avoiding any further violations.

Ex SEC Official Blasts Approach to Enforcement

Liftik’s criticism of the U.S. Securities and Exchange Commission’s approach resonates with broader discontent within the crypto industry. He highlighted the agency’s preference for enforcement actions over rulemaking or providing clear guidance.

Furthermore, the former SEC official pointed out that the agency’s approach of focusing on individual firms through a “whack-a-mole” enforcement method, which targets them one at a time, makes it challenging for businesses to keep up with changing regulations as they strive to maintain compliance.

A memorable line from Michael Liftik, partner at law firm @quinnemanuel and a former senior @SECGov employee, from today’s @FinancialCmte hearing:

The Securities and Exchange Commission (SEC) hasn’t provided new regulations or clear guidance regarding digital assets. Simultaneously, they have been actively involved in…

— Eleanor Terrett (@EleanorTerrett) September 18, 2024

This criticism comes as the U.S. Securities and Exchange Commission continues to scrutinize decentralized finance platforms. Over recent years, several firms, both centralized and decentralized, have been charged with securities violations, reinforcing Liftik’s argument. The agency has made it clear that labeling a platform as “decentralized” or “autonomous” does not exempt it from securities laws.

Rari Capital’s History and Hack Incident

In May 2022, a major security breach occurred on Rari Capital’s Fuse lending and borrowing platform, causing a loss of approximately $80 million due to unauthorized access. This incident added to the legal issues that Rari Capital was already facing.

Due to the recent hack, I found myself compelled to pause all incoming investments and start the process of gradually phasing out the platform. Regrettably, this course of action ultimately led to its closure.

In the agreement reached by the agency, it was acknowledged that the firm had collaborated in returning fees tied to performance back to impacted users and made amends for the hack through corrective actions. The deal with Rari Capital Infrastructure LLC, which now owns the company post-hack, also includes a clause that requires the company to abstain from future infractions of securities laws.

Growing Regulatory Divide in U.S. Crypto Legislation

The current actions by the U.S. Securities and Exchange Commission coincide with ongoing discussions in Congress about cryptocurrency regulation. Recent congressional hearings have revealed disagreements among lawmakers on how to regulate the digital asset sector. A memo circulating within Congress hints that some Democratic leaders perceive crypto as a politically charged matter, associating it with “extreme supporters of the MAGA ideology.

At the same time that ex-SEC officials are speaking out, this political disagreement has led to increased tension. Regulators and legislators are working together to create comprehensive crypto regulations. Bills like the FIT 21 bill, which aims to categorize digital assets and update securities laws, continue to be a topic of intense discussion.

Supporters of stricter rules claim that the present regulatory structure under the Biden administration is hindering creativity, whereas those favoring tougher regulations emphasize the need for increased investor safeguards.

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2024-09-19 02:26