NEW YORK (LN) — New York Attorney General Letitia James on Tuesday secured more than $5 million from cryptocurrency platform Uphold HQ, Inc. over its promotion of CredEarn, a purportedly safe savings product that was actually funded by risky micro-loans to video game players in China with low monthly incomes and no credit histories — and that caused thousands of investors to lose millions of dollars when its sponsor collapsed in 2020.
The settlement resolves an investigation by the Office of the Attorney General finding that Uphold misled customers by advertising CredEarn, an investment product created by Cred, LLC and its chief executive Daniel Schatt, as a safe, reliable savings product. In reality, Cred generated its promised interest payments through micro-loans to video game players in China who had low monthly incomes, no credit histories, and no access to credit through traditional Chinese financial institutions.
Uphold also told customers that Cred carried comprehensive insurance — a claim the OAG found had no basis in the industry. No insurance that would protect retail investors from investment losses of digital assets existed in the industry at the time.
Uphold offered CredEarn on its platform and mobile app from January 2019 through October 2020. The OAG found the company was promoting the product without registering as a broker or commodity broker-dealer, in violation of New York law.
Starting in March 2020, Cred incurred significant losses due to its risky lending practices and mismanagement, and declared bankruptcy in November 2020, resulting in investor losses of millions of dollars.
Under the settlement, Uphold will pay $5 million directly to harmed customers — more than five times the fees it collected from the arrangement. All payments Uphold receives from Cred's bankruptcy proceedings, in which it is owed $545,189, will also be paid to customers who were harmed. Affected customers will receive email notification that funds are being distributed to their accounts.
Uphold must also maintain and improve its due diligence policies before partnering with or recommending any third-party investment product, and will register as a broker with the OAG.
"Uphold promoted risky investments and misled its customers to believe they were safe," James said in a statement. "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."
The matter was handled by Senior Enforcement Counsel Tanya Trakht and Fennie Wang, with assistance from Assistant Attorney General Stephen Ross and other members of the Investor Protection Bureau.