Highlights:
- SEC settled with TrustToken and TrueCoin over misleading TUSD investment practices.
- Companies promoted TUSD as securely backed, while funds were invested in a high-risk offshore fund.
- TrueCoin and TrustToken face financial penalties, including disgorgement and civil penalties, totaling over $600,000.
The United States Securities and Exchange Commission (SEC) has settled charges against TrueCoin LLC and TrustToken Inc. for their roles in misleading investors about the security and stability of their investment in the stablecoin TrueUSD (TUSD). The charges, revealed on September 24, 2024, also include the unregistered offer and sale of securities. As per the SEC, the complaint, filed in the US District Court for the Northern District of California, details a range of fraudulent actions conducted by the two companies.
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The US SEC announced a settlement with TrustToken and TrueCoin, the latter of which was suspected of defrauding TUSD investors. The SEC stated: “As alleged, by September 2024, 99% of the reserves backing TUSD were invested in the speculative fund” and the defendants “offered and…
— Wu Blockchain (@WuBlockchain) September 25, 2024
SEC Accuses Companies of Misleading Investors About TUSD’s Backing and Unregistered Sales
TrueCoin, the issuer of TUSD, and TrustToken, the developer of the TrueFi lending protocol, are accused of selling investment contracts tied to TUSD without proper registration between November 2020 and April 2023.
The SEC emphasized that the companies promoted TUSD as a secure investment, claiming it was backed “one-to-one” by US dollars or equivalent assets. However, investigations uncovered that a large portion of the assets meant to back the stablecoin was actually invested in a high-risk offshore fund. This strategy sought higher returns, exposing investors to unreported risks.
In March 2022, following the transfer of TUSD operations to an offshore entity, more than half a billion dollars was reportedly funneled into the speculative fund. By Fall 2022, both companies were reportedly aware of the fund’s redemption issues. Despite this, they continued to assure investors that TUSD remained securely backed. Jorge G. Tenreiro, Acting Chief of the SEC’s Crypto Assets & Cyber Unit, highlighted the risks of these deceptive practices.
He stated:
“TrueCoin and TrustToken sought profits for themselves by exposing investors to substantial, undisclosed risks through misrepresentations about the safety of the investment. This case is a prime example of why registration matters, as investors in these products continue to be deprived of the key information needed to make fully informed decisions.”
TrueUSD has a market cap of around $494 million and is experiencing a minor de-pegging after the recent news.
TrueCoin and TrustToken Settle SEC Charges Without Admitting Guilt
In response to the charges, both TrueCoin and TrustToken agreed to settle without admitting or denying the allegations. The settlement includes injunctions against future violations of federal securities laws and civil penalties of $163,766 for each company. Additionally, TrueCoin must disgorge $340,930, plus $31,538 in prejudgment interest, subject to court approval.
Gensler Warns on Stablecoins and Securities Regulation
SEC Chair Gary Gensler has previously likened stablecoins to money market funds and bank deposits. He has also cautioned that stablecoins can facilitate illicit activities, undermine the crypto ecosystem, and pose market integrity concerns. Gensler also suggested that stablecoins could be classified as securities in 2021.
During a speech at the American Bar Association, Gensler said:
“Make no mistake: It doesn’t matter whether it’s a stock token, a stable value token backed by securities, or any other virtual product that provides synthetic exposure to underlying securities. These platforms — whether in the decentralized or centralized finance space — are implicated by the securities laws and must work within our securities regime.”
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