Uphold Hit with $5M Penalty by New York Over Deceptive Crypto Savings Product
Attorney General Letitia James of New York obtained a $5 million settlement against Uphold following its involvement in marketing CredEarn, a cryptocurrency savings offering that concealed significant risks from investors.
Attorney General Letitia James of New York has obtained a settlement exceeding $5 million from digital currency platform Uphold in connection with its involvement in the promotion of a deceptive investment offering.
The financial settlement revolves around Uphold's marketing activities for CredEarn, a financial product provided by Cred, LLC and its Chief Executive Officer Daniel Schatt. From January 2019 through October 2020, the digital currency platform advertised CredEarn to its user base through its platform and mobile application, positioning it as a secure, dependable savings vehicle offering appealing annual interest rates.
Nevertheless, Uphold failed to disclose to its customers that Cred was producing those investment returns through the issuance of small loans to individuals with low incomes who were video game players in China, representing borrowers who lacked credit histories and had no ability to access conventional banking institutions, according to a statement from the Attorney General's office.
Uphold additionally informed its customers that Cred maintained "comprehensive insurance," an assertion that the Attorney General's office determined was fraudulent. Such insurance coverage protecting individual investors against losses related to digital assets did not exist within the industry during that period. In addition to the deceptive marketing practices, Uphold was conducting operations without obtaining the necessary broker or commodity broker-dealer registration required by law.
Cred collapse hits Uphold users
Cred started accumulating financial losses stemming from its high-risk lending operations in March 2020 and subsequently filed for bankruptcy protection eight months afterward, resulting in thousands of Uphold customers globally being left with significant losses, the announcement stated.
According to the terms of the settlement, Uphold is required to pay $5 million in direct compensation to impacted customers, representing more than five times the amount of fees the platform earned from the partnership. Any additional funds Uphold is able to recover from Cred's continuing bankruptcy proceedings, in which it holds a claim for $545,189, will likewise be distributed to the harmed investors. Impacted users will receive notification via email at the time the funds are deposited into their accounts.
Investors should be able to trust the industry advice they receive, and my office will always work to ensure bad actors are held accountable for endangering their customers' financial security.
Letitia James, New York Attorney General
New York's legal run-up with CFTC
In the previous month, New York initiated legal action against Coinbase and Gemini, alleging that their prediction market products were in violation of state gambling regulations.
The CFTC responded by filing a lawsuit against New York in federal court, contending that federal legislation grants it exclusive authority over prediction markets and requesting a permanent injunction to prevent the state's enforcement activities.