SEC Allegedly Pressured DeFi Founders to Never Return to Crypto, Says Venture Capitalist

Joey Krug, a partner at the venture capital firm Founders Fund, claims that the U.S. Securities and Exchange Commission (SEC) under former chair Gary Gensler used settlements to force founders of decentralized finance (DeFi) platforms to agree that they would never return to the crypto industry. According to Krug, the SEC's actions have had a chilling effect on DeFi entrepreneurs, with some settling under the condition that they would not work in crypto again.

Pressure Tactics and Settlement Clauses

Speaking at the ETHDenver conference on February 27, Krug revealed the disturbing practice, which he said involved the SEC approaching DeFi founders and offering them settlements under the condition that they would sign agreements prohibiting them from ever engaging in the crypto space again. “In many cases, they said you also have to sign a thing that says you will never work in crypto again,” Krug said. He further explained that these agreements included non-disparagement clauses, meaning the founders were forbidden from publicly discussing the terms or the pressure they faced during negotiations.

Krug's remarks add fuel to the growing industry concern about what has been referred to as "Operation Chokepoint 2.0." This theory suggests that the Biden administration's regulatory actions, including pressure on financial institutions to sever ties with crypto firms, are part of a broader effort to stifle the crypto industry. Krug believes the government used these settlements as a tool to discourage DeFi founders, warning that failing to comply would result in potential legal consequences.

“A Crazy Administrative State”

At first, Krug was skeptical about the existence of such settlements but claimed that some DeFi founders—whom he did not name—later showed him their agreements. These documents allegedly included clauses that explicitly prohibited the founders from returning to the crypto industry. “Sure enough, there are clauses that say you can never work in crypto again [and] you can’t talk about this to anyone,” Krug explained. He described the situation as “a crazy, crazy administrative state that got really out of control.”

Krug also emphasized that these settlements had not led to criminal charges. He claimed that while civil agencies can pressure individuals into such agreements, they must defer to the Department of Justice (DOJ) if they wish to pursue criminal charges. According to Krug, no cases have been referred to the DOJ, and he believes that the founders in question have not broken any laws.

The SEC’s “Gag Rule” and Lack of Transparency

The SEC’s settlements have long included a “gag rule,” which prohibits defendants from publicly criticizing the agency’s actions or claims. This clause, which has been part of the SEC’s settlement practices since 1972, has drawn criticism from some quarters, including Commissioner Hester Peirce, who has argued that it undermines regulatory integrity.

Krug explained that the only way DeFi founders could publicly discuss their settlements is if they are called to testify before Congress. He suggested that many founders would be eager to share their experiences if given the opportunity. “There are a lot of founders who would love to talk about how the government basically really screwed them over if Congress asked them to testify,” he said.

Wider Implications for the Crypto Industry

Krug’s comments come at a time when the crypto industry is facing increasing scrutiny from U.S. regulators. In early February, both the U.S. House and Senate held hearings on the issue of crypto debanking, where executives from the crypto industry shared their experiences of being cut off from financial services. The Federal Deposit Insurance Corporation (FDIC), which regulates banks, also recently released nearly 800 pages of "pause letters" sent to financial institutions, urging them to reconsider their relationships with crypto companies.

As the regulatory landscape for cryptocurrencies continues to evolve, the pressure on DeFi founders and other crypto entrepreneurs is mounting. Krug’s allegations raise significant questions about the tactics being used by the SEC and other agencies to regulate the industry. Whether these actions will lead to lasting changes in how crypto companies operate in the U.S. remains to be seen, but the growing concern over regulatory overreach continues to shape the conversation around the future of digital assets in the country.