SEC, states fine BlockFi $100M; crypto lending product declared a security

BlockFi, based in New Jersey, will pay $50 million to the SEC to settle charges it misled investors and failed to register its crypto lending products as securities. It agreed to pay another $50 million worth of fines to settle similar charges with 32 individual states. Although the company did not admit nor deny the SEC’s findings, BlockFi agreed to cease and desist from further violations of federal securities law and will stop offering its crypto lending products to U.S.-based investors.

“This is the first case of its kind with respect to crypto lending platforms. 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,” said SEC Chair Gary Gensler in a press release. “It further demonstrates the Commission’s willingness to work with crypto platforms to determine how they can come into compliance with those laws.”

According to the SEC’s order, from March 2019 to the present, BlockFi has offered a crypto lending product, called BlockFi Interest Accounts (BIAs), and paid investors variable monthly interest payments in exchange for lending their crypto assets to BlockFi. The firm then lends the crypto assets to institutional borrowers.

As of Dec. 8, 2021, BlockFi and its affiliates held approximately $10.4 billion in BIA assets on behalf of 572,160 investors, of which 391,105 were located in the United States, the SEC said. The company’s total BIA assets held reached as high as approximately $14.7 billion in March 2021.

The SEC ruled BlockFi’s crypto lending products are investment contracts and the company had an obligation to either register the product with the agency or file for an exemption. BlockFi did neither, the SEC said. The order also found 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,” according to the SEC.

BlockFi made a false and misleading statement about the collateral for those loans on its website from March 2019 to August 2021, when it “materially overstated the degree to which it secured protection from defaults by institutional borrowers through collateral,” the SEC said.

The SEC indicated in September 2021 it considers crypto lending products to be securities when it issued a Wells Notice to cryptocurrency platform Coinbase over its lending product, Lend. Coinbase decided to cancel Lend after the SEC threatened to sue.

Another case with even broader implications for the industry is the SEC’s lawsuit against Ripple Labs and its cryptocurrency, XRP, which is still playing out in U.S. District Court for the Southern District of New York. The court is likely to offer an opinion in that case about whether XRP, which was the third-largest cryptocurrency by market cap when the SEC filed its complaint in December 2020, is a security that falls under the agency’s regulatory purview.

BlockFi response

Far from chastened by the settlement, BlockFi hailed it as “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,” the company said in a press release. BlockFi said it cooperated with the investigation and implemented remedial actions as a result of the SEC’s findings.

While U.S-based investors in BlockFi’s crypto lending platform will be allowed to keep their accounts, they will be barred from adding new assets, as of Monday. The company also agreed not to allow U.S.-based investors to create new accounts. The SEC’s order does not affect accounts held by foreign investors, BlockFi said.

In addition, BlockFi announced it will file a Form S-1 draft registration statement with the SEC for BlockFi Yield, “a new crypto interest-bearing security that would be available to our U.S. clients.” In the S-1, BlockFi will have to describe how the investment works and the risks involved. If the SEC signs off, BlockFi will be allowed to offer BlockFi Yield to new U.S.-based clients, as well as existing U.S.-based clients who currently have BIAs.

Editor’s note: This story’s headline was amended to reflect states’ involvement in the $100 million agreement.