Crypto startup BlockFi agreed to pay $100 million to settle allegations from the SEC and state regulators that it illegally offered a product violating securities law.
Why it matters: This is the largest-ever penalty against a cryptocurrency firm and the first in which a crypto company was charged with violating the registration provisions of the Investment Company Act of 1940.
- Through its action, the SEC is setting a precedent with regard to its handling of crypto lending accounts, clarifying that it views these types of offerings as securities and will regulate them as such.
Catch up quick: Beginning in March 2019, BlockFi began offering so-called interest accounts to the public, in which investors lent the company crypto assets in exchange for its promise to provide a variable monthly interest payment.
- BlockFi then pooled investor assets and exercised full control over how much to hold, lend and invest.
Details: According to the SEC, BlockFi misled investors about the level of risk they were taking on by lending out their crypto assets, and that they didn’t have the information they needed to make appropriate investment decisions.
- The charging document states that approximately 24% of institutional crypto asset loans BlockFi made in 2019 were over-collateralized. In 2020, that number was 16%, and in 2021 it was 17%.
- Basically, if there were a run on its assets, BlockFi would be unable to continue paying investors interest or return their loaned crypto.
- In addition, the SEC charged BlockFi with not having the appropriate registration statement filed to offer securities, which made up more than 40 percent of its assets.
Without admitting or denying the SEC’s findings, BlockFi agreed to cease offering or selling its unregistered interest accounts in the United States.
- In a press release, BlockFi said the company cooperated with the investigation and put remediation actions into place.
- In a separate blog post, the company said it has been hoping for "increased regulatory clarity" and that "today's resolution" means the company is "leading the creation of a new regulatory landscape for crypto."
By the numbers: BlockFi agreed to pay a $50 million penalty and cease sales of its lending product. It has also agreed to pay an additional $50 million in fines to 32 states to settle similar charges.
What to watch: BlockFi's said it intends to register a new lending product, BlockFi Yield, to be offered and sold under the Securities Act of 1933.
- If approved, BlockFi Yield would become the first SEC registered interest-bearing crypto security, the company says.
The intrigue: The announcement of the settlement comes on the heels of Sunday night’s Super Bowl, dubbed the Crypto Bowl this year due to the large number of crypto companies advertising during the game — a signal of their mainstream ambitions.
The big picture: Under chair Gary Gensler, the SEC is embarking on one of the most ambitious agendas in the agency’s history — examining everything from meme stocks and crypto to special-purpose acquisition companies (SPACs), Wall Street pay and climate change disclosures.
- Public spats between Gensler and Coinbase last year previewed what’s likely to come.
Editor's note: This story has been updated with additional details throughout.
