Thousands of cryptocurrency investors suffered losses after a yield product collapsed, prompting a regulatory investigation by New York State. Attorney General Letitia James has secured over $5 million in fines from the crypto platform Uphold for its role in promoting the failed CredEarn project.
The investigation revealed that Cred transferred user funds to a Chinese micro-lending service called MoKredit. This lending institution provided short-term unsecured loans to individuals without credit histories. The small loan amounts raised concerns about its risk management practices.
Additionally, Uphold had repeatedly claimed that Cred had comprehensive insurance coverage. However, regulators stated that there was no coverage for retail cryptocurrency losses at the time. Over 6,000 users invested approximately $50 million into CredEarn through the Uphold platform, resulting in losses exceeding $34 million after the bankruptcy. Court documents show that over 6,000 claims total $140 million, with valuations increasing as cryptocurrency prices rose.
Expanding Responsibility of Promoters and Regulatory Scope
This case significantly targets distributors rather than product issuers, marking a shift in enforcement strategy. The Attorney General's office determined that Uphold acted as an unregistered broker under state law. This approach goes beyond earlier federal actions primarily aimed at issuers like BlockFi.
Meanwhile, Uphold CEO Simon McLoughlin dismissed some of the investigation's findings, stating that the company was also harmed by Cred's collapse. He emphasized that federal investigators did not accuse Uphold of intentionally promoting fraud. The company also noted that only a few affected users reside in New York.
Furthermore, the settlement agreement requires Uphold to forfeit any compensation obtained from the Cred bankruptcy proceedings. The company currently has over $545,000 in claims in that process. This outcome highlights the growing scrutiny of platforms distributing crypto financial products. Regulators are holding intermediaries accountable for presenting investment risks. As enforcement measures evolve, companies may face stricter obligations when offering third-party yield services.