The U.S. Securities and Exchange Commission (SEC) recently announced a settlement with TrueCoin and TrustToken concerning their handling of TrueUSD (TUSD), a stablecoin. 

The settlement revolves around charges of fraudulent and unregistered sales of investment contracts.

Overview of the Settlement

On Tuesday, the SEC revealed that TrueCoin and TrustToken agreed to resolve the allegations against them by consenting to final judgments. Each company will pay a civil penalty of $163,766. 

Neither company admitted nor denied the SEC's allegations as part of the settlement. Additionally, TrueCoin must pay disgorgement of $340,930 along with prejudgment interest amounting to $31,538.

Allegations Against TrueCoin and TrustToken

The SEC's complaint detailed that between November 2020 and April 2023, TrueCoin and TrustToken engaged in the unregistered offer and sale of investment contracts. They sought opportunities to profit from these transactions while misrepresenting the safety and backing of TrueUSD.

The SEC described TrueUSD as a “purported stablecoin,” suggesting it was falsely marketed as a safe investment. Investors were led to believe that TUSD was fully backed by U.S. dollars or equivalent assets. 

However, the reality was reportedly different. A substantial portion of the assets backing TUSD was instead invested in a speculative and risky offshore investment fund, raising serious concerns about the stability of the stablecoin.

In March 2022, TrueCoin and an offshore entity invested over $500 million of TUSD’s backing in this speculative fund. This move raised red flags for the SEC, as it indicated a lack of transparency and a potential misalignment with investor interests.

Ignoring Warning Signs

The complaint noted that TrueCoin and TrustToken were aware of issues regarding redemption at the offshore fund. Despite these concerns, the companies continued to make false statements to investors, insisting that TUSD was backed one-to-one by U.S. dollars. 

By September 2024, an alarming 99% of the reserves backing TUSD were invested in this speculative fund.

The issues surrounding TUSD became particularly noticeable in June 2023 when the stablecoin depegged. This event followed a pause in minting through the crypto custody service Prime Trust, which had recently received a cease-and-desist order from Nevada regulators due to suspected insolvency. 

The depegging continued into January, prompted by massive sell-offs driven by uncertainties surrounding real-time attestations of TUSD's reserves. This situation hinted at potential under-collateralization, a serious issue for any stablecoin.