The United States Securities and Exchange Commission (SEC) has settled charges against TrueCoin and TrustToken for fraudulent and unregistered sales of investment contracts tied to the TrueUSD stablecoin. This settlement, announced on September 24, comes after the companies opted not to have the case heard by a judge.
The SEC’s complaint, filed in the District Court for Northern California, outlines serious allegations against both companies. From November 2020 to April 2023, TrueCoin and TrustToken offered and sold unregistered investment contracts linked to TrueUSD (TUSD), promising profit-making opportunities via TrueFi, a lending protocol.
Allegations
- Unregistered Sales: The SEC claims that the companies sold unregistered investment contracts.
- False Marketing: They allegedly misrepresented TUSD as being fully backed by U.S. dollars or equivalent assets, while in reality, the funds backing the stablecoin were invested in a high-risk overseas investment fund.
- Awareness of Redemption Issues: By the fall of 2022, the companies reportedly recognized potential difficulties with TUSD redemption. Despite this, the SEC states that by September 2024, approximately 99% of the funds backing TUSD were still tied up in overseas investments.
Depegging and Market Challenges
The situation surrounding TUSD has been precarious for some time. Notably, the stablecoin faced depegging issues in June 2023 after it paused minting through Prime Trust, a crypto custody service. This pause followed a cease-and-desist order issued by Nevada regulators due to concerns about Prime Trust’s solvency.
Further challenges emerged in January 2024, when TUSD depegged again amid significant selling activity, which raised questions about the stablecoin’s real-time reserve attestations. These problems were exacerbated by claims linking the issues to mining activities associated with Binance Launchpool, prompting TrueCoin and TrustToken to engage a second auditing firm.
Market Reactions
- Binance’s Role: In March 2024, Binance delisted several TUSD trading pairs, reflecting growing concerns about the stablecoin’s stability, although it did not fully delist TUSD.
- Investor Sentiment: The back-and-forth of TUSD’s pegging and the uncertainty around its reserves have led to mixed reactions from investors, with many expressing caution.
Settlement Details
While TrueCoin and TrustToken did not admit or deny the SEC’s allegations, they agreed to certain terms in the settlement. Both companies will face final judgments that prohibit them from further violations of federal securities laws. They are also required to pay civil penalties amounting to $163,766 each.
- TrueCoin Financial Obligations:
- Civil Penalty: $163,766
- Disgorgement: $340,930
- Prejudgment Interest: $31,538
The settlements are pending court approval.
Implications for TrueUSD and the Broader Market
This case serves as a cautionary tale for other cryptocurrency issuers and investors alike. The SEC’s increasing scrutiny of stablecoins and the regulatory landscape poses challenges for companies operating in the crypto space.
The SEC’s settlement with TrueCoin and TrustToken highlights the ongoing challenges faced by stablecoin issuers and the need for transparency and compliance within the cryptocurrency industry. As regulatory scrutiny increases, it will be crucial for companies to prioritize ethical practices to maintain investor confidence and market stability.
