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BlockFi Lending agreed to pay a $100 million penalty on Monday as part of a first-of-its-kind case where the Securities and Exchange Commission (SEC) declared a form of cryptocurrency lending product to be a security.
BlockFi, based in New Jersey, was fined $50 million by the Securities and Exchange Commission to settle charges of misleading investors and failing to register its crypto lending products as securities. It agreed to pay another $50 million in fines to 32 different states to settle similar charges. BlockFi agreed to stop offering its crypto lending products to U.S.-based investors and to cease and desist from further violations of federal securities law, despite the fact that the company did not admit or deny the SEC's findings.
"This is the first case of its kind with respect to crypto lending platforms. In a press release, SEC Chair Gary Gensler stated, "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.”
BlockFi offered a crypto lending product called BlockFi Interest Accounts (BIAs) from March 2019 to the present, according to the SEC's order, and paid investors variable monthly interest in exchange for lending their crypto assets to BlockFi. The crypto assets are then lent to institutional borrowers by the company.
According to the SEC, BlockFi and its affiliates held approximately $10.4 billion in BIA assets on behalf of 572,160 investors as of Dec. 8, 2021, with 391,105 of them based in the United States. In March 2021, the company's total BIA assets held were estimated to be around $14.7 billion.
The Securities and Exchange Commission (SEC) ruled that BlockFi's crypto lending products are investment contracts, requiring the company to either register the product or file for an exemption. According to the SEC, BlockFi did neither. According to the SEC, BlockFi operated as an unregistered investment company for more more than 18 months "because it issued securities and also held more than 40 percent of its total assets, excluding cash, in investment securities, including loans of crypto assets to institutional borrowers."
From March 2019 to August 2021, BlockFi made a false and misleading statement on its website about the collateral for those loans, the SEC said, when it "materially overstated the degree to which it secured protection from defaults by institutional borrowers through collateral."
When the SEC issued a Wells Notice to cryptocurrency platform Coinbase over its lending product, Lend, in September 2021, it stated that it considers crypto lending products to be securities. After the SEC threatened to sue, Coinbase decided to cancel Lend.
The SEC's lawsuit against Ripple Labs and its cryptocurrency, XRP, is still ongoing in the United States District Court for the Southern District of New York, and it has even broader implications for the industry. In that case, the court is expected to rule on whether XRP, which was the third-largest cryptocurrency by market cap when the SEC filed its complaint in December 2020, is a security subject to the agency's regulatory oversight.
BlockFi's reaction
BlockFi hailed the agreement as a "l“a landmark resolution with federal and state regulators" that provides "regulatory clarity and a path forward for clients across the United States who want to earn interest on their crypto assets," according to a press release. As a result of the SEC's findings, BlockFi said it collaborated with the investigative process and started taking corrective measures.
While investors in BlockFi's crypto lending platform in the United States will be able to maintain their accounts, they will no longer be able to add new assets as of Monday. The company also consented not to allow new accounts to be opened by investors based in the United States. According to BlockFi, the SEC's order has no bearing on accounts held by foreign investors.
BlockFi also announced that it will file a Form S-1 draft registration statement with the Securities and Exchange Commission for BlockFi Yield, a "a new crypto interest-bearing security that would be available to our U.S. clients." BlockFi will have to explain how the investment works and the associated risks in the S-1. BlockFi will be able to offer BlockFi Yield to new and existing U.S.-based clients with BIAs if the SEC approves.
By fLEXI tEAM