On Tuesday, the Securities and Exchange Commission (SEC) disclosed that TrueCoin LLC and TrustToken Inc., the parties behind the TrueUSD (TUSD) stablecoin, improperly invested nearly all their reserves in a speculative offshore fund. This revelation led to a settlement of charges against the companies for fraudulent and unregistered sales of investment contracts.

According to the SEC’s detailed complaint, filed in the US District Court for the Northern District of California, TrueCoin and TrustToken engaged in unregistered offers and sales of TUSD as investment contracts through their TrueFi lending protocol from November 2020 to April 2023.

They falsely advertised these offerings as secure investments backed by US dollars. In truth, they diverted these funds to high-risk investments that significantly endangered the capital of investors.

TrueCoin and TrustToken Settled With the SEC

By March 2022, more than half a billion dollars backing TUSD had been invested in the risky fund by TrueCoin and an associated offshore entity. SEC alleges that despite redemption challenges identified by fall 2022, both entities continued to mislead investors about TUSD being fully backed by US dollars. By September 2024, a shocking 99% of TUSD’s reserves were tied to this speculative fund.

Read more: A Guide to the Best Stablecoins in 2024

Jorge G. Tenreiro, Acting Chief of the SEC’s Crypto Assets & Cyber Unit, emphasized the gravity of the misconduct.

“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,” Tenreiro said.

Responding to the SEC’s findings, TrueCoin and TrustToken agreed to settle the charges without admitting or denying the allegations. They consented to final judgments that prevent them from future violations of the federal securities laws.

Additionally, they will each pay civil penalties of $163,766. Moreover, the SEC ordered TrueCoin to disgorge $340,930 plus prejudgment interest of $31,538, all pending court approval.

It is worth noting that in 2024, the SEC collected a record $4.68 billion in fines from the crypto sector. Hence, Tuesday’s congressional hearing critically examined the SEC’s approach to regulating digital assets.

The lawmakers vigorously questioned SEC Chairman Gary Gensler and his fellow commissioners about their regulatory methods. The hearing highlighted deep divisions over the SEC’s strategy, with accusations of its excessive reach into crypto regulation.

Read more: Who Is Gary Gensler? Everything To Know About the SEC Chairman

During the hearing, Committee Chairman Patrick McHenry criticized Chairman Gensler for regulatory overreach. He also accused the SEC of enforcing regulations without adequate justifications, economic analysis, or public engagement.

“Chair Gensler’s legacy will be defined by turning the once proud institution of the SEC into a rogue agency,” McHenry said.