On its face, Monday’s ruling by the Securities and Exchange Commission (SEC) regarding BlockFi’s cryptocurrency lending product provided some much-needed regulatory clarity.

And yet, the case is a mere pebble skipping across the waves of a vast, unregulated crypto sea.

A settlement reached between the two sides contained a determination by the SEC that BlockFi’s crypto lending product, BlockFi Interest Accounts, is an investment contract that must be registered as a security. The case marked the first time the SEC officially ruled on how it views a crypto lending product.

BlockFi, which was fined a total of $100 million by the SEC and state regulators, hailed the agreement as a “landmark resolution” that provides “regulatory clarity and a path forward for clients across the United States who want to earn interest on their crypto assets.”

It is a landmark resolution—and it isn’t. The ruling applies to only a narrow slice of the cryptocurrency market: lending products. And it serves to reaffirm what we learned in September, when the SEC issued a Wells Notice to BlockFi competitor Coinbase regarding its planned lending product. Coinbase decided to scuttle the launch of its product, Lend, in the face of the agency’s potential lawsuit.

With the BlockFi settlement, any crypto company seeking to launch a lending product must take at least one step to be viewed as legitimate in the eyes of the SEC: file a Form S-1 draft resolution statement. The disclosure describes to potential investors how the investment works and what the risks are.

According to SEC Commissioner Hester Peirce, the process for a crypto lending product being greenlighted by the agency will be difficult.

“Getting an S-1 to the point where staff will declare it effective is often a months-long, iterative process. When crypto is at issue, the timeframe is likely to be longer than it would be for more traditional filings,” Peirce wrote in a statement Monday.

BlockFi will also have to jump through a second regulatory hoop because the SEC found it operated as an unregistered investment company for two years. Most entities in BlockFi’s shoes, having settled with the agency, would have to register as an investment company under the Investment Company Act. But Peirce noted since BlockFi issues debt securities, it would have to seek an exemption or exclusion from the regulation.

“If BlockFi seeks refuge in this rarely used exclusion, it has a challenging path to prove that it qualifies, particularly with the Commission staff’s typical heightened scrutiny for crypto companies,” she wrote.

The big picture

The BlockFi settlement, though the first of its kind, does little to settle the larger regulatory question still looming: Are cryptocurrencies securities or currencies? One would fall under the SEC’s thumb, while the other would not.

Current SEC Chair Gary Gensler and his predecessor, Jay Clayton, agree on precious little when it comes to nearly every aspect of regulatory policy. Based on public statements, though, they have plenty of common ground on cryptocurrency.

In an August speech to the Aspen Security Forum, Gensler laid out what he believes cryptocurrencies are—and what they are not.

Public fiat currencies—like the dollar, euro, sterling, yen, yuan, and more—fulfill the three functions of money, Gensler said: “a store of value, unit of account, and medium of exchange.”

“No single crypto asset, though, broadly fulfills all the functions of money,” he continued. “Primarily, crypto assets provide digital, scarce vehicles for speculative investment. Thus, in that sense, one can say they are highly speculative stores of value.”

Clayton previously shared similar sentiments, though he left more wiggle room for select cryptocurrencies to avoid SEC regulation.

In a 2017 statement, Clayton said, “[W]hile there are cryptocurrencies that do not appear to be securities, simply calling something a ‘currency’ or a currency-based product does not mean that it is not a security.” He added most, if not all, initial coin offerings (ICOs)—the most common vehicle to launch a cryptocurrency—are securities.

“By and large, the structures of initial coin offerings that I have seen promoted involve the offer and sale of securities and directly implicate the securities registration requirements and other investor protection provisions of our federal securities laws,” Clayton wrote.

From Gensler and Clayton’s viewpoint, most cryptocurrencies operating in the United States are unregistered investment schemes that are violating federal securities law. They are risky investments that don’t properly disclose that risk to investors. They are an asset class “rife with fraud, scams, and abuse,” Gensler said.

You would think the SEC would have brought the hammer down on the cryptocurrency industry by now.

Nope. According to Cornerstone Research, the SEC brought 20 enforcement actions against digital asset companies in 2021 (70 percent of those against ICOs) on charges of fraud (65 percent), trading unregistered securities (80 percent), or both (55 percent). The same study stated the agency has brought 58 litigation actions and 39 administrative proceedings against digital asset market participants since 2013, imposing $2.35 billion in total monetary penalties.

That’s less than 100 cases against digital asset companies in eight years. The cryptocurrency market is worth an estimated $2 trillion as of Feb. 15, according to CoinMarketCap.

I suspect the biggest stumbling block for the SEC is proving these crypto companies, many of which are headquartered overseas, operate in the United States. But it does make me wonder: If cryptocurrencies are such risky investments, so rife with fraud and popular as a payment system for cybercriminals, why isn’t the regulator being more aggressive?