In a landmark move, the U.S. Securities and Exchange Commission (SEC) has reached a settlement with the now-defunct DeFi protocol, Rari Capital, marking a significant step in the regulation of decentralized finance (DeFi). The settlement, which awaits court approval, includes a range of penalties, a capped ban, and a cease-and-desist order.
SEC Charges Rari Capital For Misleading Investors
The SEC’s charges against Rari Capital, which was once a prominent player in the DeFi space, revolve around allegations of misleading investors and operating as unregistered brokers. The regulator asserts that Rari Capital launched investment products—earn pools and fuse pools—that functioned as cryptocurrency investment funds. At their height, these products managed over $1 billion in crypto assets.
According to the SEC, Rari Capital misled investors about the returns from its earning pools, promising automatic rebalancing into the best yield opportunities. However, this rebalancing often required manual intervention, which Rari Capital failed to provide consistently. The protocol also advertised high annual percentage yields (APYs) without adequately disclosing associated fees, leading to financial losses for some investors.
Charges and Settlement Details
The charges extend to Rari Capital’s co-founders—Jai Bhavnani, Jack Lipstone, and David Lucid—who are accused of engaging in unregistered broker activities. Additionally, Rari Capital Infrastructure LLC, which took over the platform in 2022, faces allegations of unregistered securities offerings and broker activities.
The settlement includes permanent injunctions, civil penalties, and disgorgement with interest. Notably, the co-founders are barred from serving as officers or directors for five years. While Rari Capital has agreed to the cease-and-desist order, it neither admitted nor denied the SEC’s findings. The final approval of the settlement is pending court review.
Rari Capital’s Rise and Fall
Founded in 2020, Rari Capital initially gained acclaim for its automated yield farming solutions, quickly amassing over $1 billion in total value locked (TVL) by 2021. However, the protocol faced significant hurdles that led to its downfall. In 2021, a security exploit resulted in a loss of approximately $11 million due to an integration issue with Alpha Finance.
The following year, Rari suffered another major exploit, losing over $80 million from its Fuse pools due to a reentrancy bug. This vulnerability also impacted other DeFi protocols, including Babylon Finance, which subsequently shut down. Babylon Finance’s founder, Ramon Recuero, cited the negative momentum from the Rari hack as a major factor in their decision to close.
The SEC’s action underscores the regulator’s determination to bring oversight to decentralized platforms. Rari Capital’s case highlights the challenges that DeFi protocols face in navigating regulatory frameworks. The settlement reflects broader regulatory themes, including investor protection and the complexities of operating within a decentralized environment.
As the DeFi sector continues to evolve, the Rari Capital case serves as a cautionary tale for other platforms, emphasizing the importance of transparency, compliance, and robust security measures in an increasingly scrutinized industry.
Disclaimer: The information in this article is for general purposes only and does not constitute financial advice. The author’s views are personal and may not reflect the views of Chain Affairs. Before making any investment decisions, you should always conduct your own research. Chain Affairs is not responsible for any financial losses.
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