The crypto company BlockFi agreed to pay $100 million to settle Securities and Exchange Commission and state charges that it failed to register with regulators that it offered and sold a lending product.
In the first order of its kind, the SEC declared that what the Jersey City, N.J., firm called BlockFi interest accounts were securities and required registration.
Beginning March 4, 2019, BlockFi offered and sold the accounts, through which investors lent crypto to BlockFi and the firm in exchange promised to provide variable monthly interest payments.
The SEC found that the product is a security and needed to be registered under the Securities Act of 1933. BlockFi itself was required to register its offers and sales of BIAs but failed to do so or to qualify for an exemption from SEC registration, the agency’s order says.
Without admitting or denying the SEC charges, Blockfi, which is backed by the venture-capital investor Peter Thiel, agreed to pay $50 million to the agency and another $50 million to 32 states.
"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,” SEC Chairman Gary Gensler said in a statement.
BlockFi agreed to stop selling the unregistered product and to "attempt to bring its business within the provisions of the Investment Company Act within 60 days," the SEC statement said.
“Additionally, the order finds that BlockFi operated for more than 18 months as an unregistered investment company 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,” the SEC statement said.
“The order also finds that BlockFi made a false and misleading statement for more than two years on its website concerning the level of risk in its loan portfolio and lending activity.”
Zac Prince, founder and chief executive of BlockFi, said in a statement that the firm would register and offer a new product, BlockFi Yield, as a "crypto interest-bearing security, which will allow clients to earn interest on their crypto assets.”
Once BlockFi Yield is registered, the BlockFi interest accounts will be converted to the new product unless the holders tell the firm otherwise.
The agreement with the SEC and states, he said, "[provides] regulatory clarity and a path forward for clients across the United States who want to earn interest on their crypto assets."
BlockFi offers crypto trading services. And on its website it says it offers a no-fee rewards credit card. The initial offer is 3.5% back in crypto for purchases within the first 90 days after the account is opened. The maximum is $100 back in bitcoin.
This is a blow for decentralized finance (DeFi), of which BlockFi is one of the representatives. Because the agreement with the SEC suggests that to offer financial products linked to interest rates, a firm must register officially.
However, such a request requires administrative burdens and obligations that DeFi startups cannot bear. They thought they could escape or even circumvent all these requirements.
There is also the risk that they lose what made them attractive to their customers who are often fans of cryptocurrencies.
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