Cryptocurrency platform BlockFi has agreed to pay $100 million to the Securities and Exchange Commission and states for failing to register the offers and sales of its retail crypto lending product.
Half of the $100 million will go to the SEC, while the other half will go to the 50 states, as well as Washington, D.C., Puerto Rico and the U.S. Virgin Islands if the governments take action to join in on the settlement.
Texas has already acted and received $943,396, which will go to its general fund, according to the Texas State Securities Board. More than 36,400 Texans had invested over $688 million in BlockFi at the end of 2021.
The New Jersey-based company was offering accounts to customers who would lend their digital tokens to BlockFi, which would then lend them to institutional customers. In exchange, account users were promised a variable monthly interest payment.
However, the SEC found that these BlockFi Interest Accounts are classified as securities under applicable law, meaning BlockFi needed to register them with the SEC, which it hadn’t done, according to the SEC.
The SEC also found that BlockFi operated for 18 months as an unregistered investment company and made “false and misleading statements” on its website about the risk of its loan portfolio and lending activity.
BlockFi neither admitted nor denied the SEC’s findings but agreed to stop the sale of its interest accounts, which it first offered in 2019, and work on bringing its business under compliance with SEC rules. It plans to register a new crypto interest-bearing security with the SEC called BlockFi Yield that will allow clients to earn interest on their crypto assets.
Zac Prince, CEO and founder of BlockFi, said in a statement that the settlement is “yet another example of our pioneering efforts in securing regulatory clarity for the broader industry and our clients, just as we did for our first product — the crypto-backed loan.”
“From the day we started BlockFi, we have always known that strong engagement with regulators would be critical for the adoption of financial services powered by cryptocurrencies,” he said.
The case wasn’t about theft or misapplication of funds, meaning BlockFi account owners won’t see any of the settlement funds because they weren’t financially impacted. This was a “pure regulatory matter” that was “solely about ensuring BlockFi becomes compliant with the law,” said Joe Rotunda, director of the Texas State Securities Board’s enforcement division.
“We wanted to make sure whatever we did, didn’t negatively impact existing investors,” Rotunda said. “If we knew BlockFi wouldn’t be able to return money to investors, we would have pursued other avenues.”
This is “the first case of its kind with respect to crypto lending platforms,” SEC Chairman Gary Gensler said in a statement. “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.”
The ruling is a signal to similar crypto platforms that they may need to register their offerings with the SEC or risk a similarly heavy fine.
“Crypto lending platforms offering securities like BlockFi’s BIAs should take immediate notice of today’s resolution and come into compliance with the federal securities laws,” said a statement from Gurbir S. Grewal, director of the SEC’s enforcement division.
