Crypto firm BlockFi settles with SEC, states for $100M over interest, lending accounts

The Securities and Exchange Commission on Monday settled charges with BlockFi Lending over its failure…

The Securities and Exchange Commission on Monday settled charges with BlockFi Lending over its failure to register its cryptocurrency interest account, bringing the largest ever penalty against a crypto firm.

The SEC found BlockFi violated three areas of federal securities laws – including selling unregistered securities, operating as an unregistered investment company and making “material false and misleading statements” on its website that the loans were over collateralized.

“This is the first case of its kind with respect to crypto lending platforms,” SEC Chair Gary Gensler said in a statement.

“Today’s settlement makes clear that crypto markets must comply with time-tested securities laws, such as the Securities Act of 1933 and the Investment Company Act of 1940. It further demonstrates the Commission’s willingness to work with crypto platforms to determine how they can come into compliance with those laws,” he added.

According to the SEC, less than a quarter of the loans from May 2019 through June 2021 were actually over collateralized. Regulators allege those statements underestimated the risks with its lending of investors crypto assets.

BlockFi has agreed to settle with the SEC, without admitting wrongdoing, for $50 million. In addition, 32 state regulators will separately announce a settlement with BlockFi that includes a $50 million penalty, making for a total penalty of $100 million.

The SEC says the fine would have been higher had BlockFi not agreed to cooperate. The crypto giant agreed to stop offering the lending accounts to new investors in the U.S., register the offer and sale of a new product called BlockFi Yield, and come into compliance with the Investment Company Act, all within 60 days.

The SEC stated that since March 2019, the company offered BlockFi interest accounts (BIAs), in which investors loaned their crypto assets to BlockFi in exchange for a promised variable monthly interest payment.

In turn, Block Fi generated that interest by using those crypto assets to make loans to institutional and corporate borrowers, and by making investments in equities and futures. BlockFi held more than $14 billion in investor assets in March 2021, according to the Commission.

In tandem with the announcement, BlockFi announced plans to register BlockFi Yield with the SEC as a new interest-bearing asset that would be sold to U.S. clients.

The action comes in the wake of Gensler warning cryptocurrency firms to register with the Commission to avoid enforcement action. SEC officials have encouraged others to view this case as a roadmap for future cases, noting that it lays out a pathway for how other crypto platforms should register proactively, and self-report violations.

The SEC and state regulators view BlockFi’s crypto interest accounts as securities.

SEC Commissioner Peirce that she sees the SEC regulating through enforcement this year, rather than creating new rules or adjusting existing rules to accommodate digital assets.

“We should be working on creating that kind of a framework that works,” said Peirce. “But I just don’t see it on the horizon based on what’s in the regulatory agenda. And that leads me to fear that a lot of this work is going to be done through enforcement.”

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