New York Attorney General Letitia James has finalized a settlement with cryptocurrency platform Uphold, requiring the company to pay over $5 million to customers who sustained losses from the CredEarn yield product. Uphold promoted CredEarn, operated by Cred LLC, between January 2019 and October 2020. The settlement, structured as an Assurance of Discontinuance under New York’s Martin Act, marks a significant development in regulatory enforcement against entities involved in promoting digital asset yield products.
Key Takeaways
- Uphold has agreed to pay more than $5 million to compensate customers affected by the collapse of the CredEarn product.
- This action represents New York’s first enforcement against a platform that promoted a third-party crypto yield product, rather than the product’s issuer.
- The Attorney General’s office found Uphold failed to disclose the source of CredEarn’s yields and misrepresented its safety and insurance coverage.
- Over 6,000 Uphold customers invested approximately $50 million in CredEarn, with significant losses incurred after Cred’s bankruptcy.
- Uphold disputes the Attorney General’s characterization of the events, with its CEO stating the company was also a victim of Cred’s fraud.
The investigation by the Attorney General’s office revealed that Uphold marketed CredEarn as a secure, savings-like investment without adequately disclosing how the returns were generated. Cred, the operator of the product, channeled customer funds through a Chinese microlender, MoKredit, to provide unsecured, short-term loans to individuals with no credit history, a practice described in a related Department of Justice indictment. Furthermore, Uphold relayed Cred’s assertion of “comprehensive insurance,” despite the lack of any industry product at the time offering coverage for retail investors’ digital asset investment losses.
Approximately 6,000 Uphold customers invested around $50 million into CredEarn via the platform. When Cred filed for bankruptcy in November 2020, these investors collectively lost over $34 million. The bankruptcy proceedings revealed over 6,000 claims totaling $140 million. The settlement mandates Uphold to pay over five times the fees it earned from hosting the product and to surrender any recovery obtained from Cred’s bankruptcy estate, where it is owed $545,189.
Uphold CEO Simon McLoughlin has contested the Attorney General’s narrative, stating that the settlement does not allege Uphold knowingly promoted a fraudulent scheme. He pointed to a separate U.S. Department of Justice investigation that identified Uphold as a victim of Cred’s fraud. Uphold asserts it acted swiftly by freezing Cred’s platform access and urging Cred to self-report to regulators upon learning of the losses.
The settlement agreement notes that Daniel Schatt, Cred’s former CEO, later served as a director of Uphold. Federal indictments confirm Schatt’s previous board membership with a separate Uphold entity, Uphold Ltd., while Cred operated independently. Schatt and Cred CFO Joseph Podulka have since pleaded guilty to wire fraud conspiracy and received prison sentences.
Regulatory Precedent and Legal Stakes
This enforcement action establishes a new legal precedent by focusing liability on the promoter of a crypto yield product, rather than solely on the product’s issuer. This approach extends the regulatory scrutiny seen in past cases, such as the SEC’s settlement with BlockFi, which targeted the issuer of unregistered securities. By proceeding under New York’s Martin Act, the Attorney General’s office has asserted that Uphold acted as an unregistered broker and commodity broker-dealer.
The legal stakes for companies promoting financial products, especially in the digital asset space, are significantly heightened by this ruling. It underscores the responsibility of platforms to conduct thorough due diligence on third-party offerings and to provide transparent disclosures to consumers. The settlement mandates Uphold to implement a robust due diligence process for vetting third-party products, including reviews of financial statements, insurance policies, compliance frameworks, and independent third-party assessments.
The Attorney General’s office has been actively pursuing enforcement actions within the crypto sector, including substantial settlements with Genesis Global Capital and Gemini. This case, however, signals a broader regulatory approach that may encompass entities facilitating access to yield-generating products, regardless of their direct involvement in the product’s creation.
Uphold, which currently does not serve New York customers, has reportedly filed a BitLicense application with the state’s Department of Financial Services. The company has also been exploring a potential U.S. Initial Public Offering (IPO).
According to the portal: www.theblock.co