BlockFi Page Explains Regulatory Stance on Interest Bearing Crypto Accounts

This week the New York Attorney General announced that it has demanded two crypto firms halt their lending programs. Additionally, the AG said it had commenced an investigation into three other firms. All of this was predicated on the statement that interest generated from crypto lending is deemed to be a security. While it was not immediately clear if anyone had complained about these programs, the AG clearly has its sights targeted at “unregulated” crypto firms.

BlockFi, one of the most successful crypto service providers that has garnered the support of a battalion of big-name VCs, is NOT based in New York but across the river in New Jersey. While BlockFi has not had anything to say (at least not yet) regarding the NYAG’s actions, it does host a page explaining the regulatory environment pertaining to BlockFi interest accounts.

Noting that these accounts are not insured by the FDIC, BlockFi states:

“BlockFi’s BIAs have been the subject of recent activity by securities regulators in New Jersey, Texas, Alabama, Vermont and Kentucky, and we are in active dialogue with these regulators. We believe that our products and services are lawful and appropriate for crypto market participants, and we remain steadfast in our commitment to protect consumers’ rights to earn interest on their crypto assets. We welcome discussions with regulators and believe that appropriate regulation of this industry is key to its future success.”

All of these regulatory actions commenced this past July with two C&Ds emanating from New Jersey and Kentucky.

So what is the rub?

New Jersey claims:

“BlockFi allows investors to purchase the BIAs [BlockFi Interest Accounts] by depositing certain eligible cryptocurrencies into accounts at BlockFi. BlockFi then pools these cryptocurrencies together to fund its lending operations and proprietary trading. In exchange for investing in the BIAs, investors are promised an attractive interest rate that is paid monthly in cryptocurrency. The BIAs are not protected by Securities Investor Protection Corporation (the “SIPC”) or insured by the Federal Deposit Insurance Corporation (the “FDIC”). The BIAs are subject to additional risk, compared to assets held at SIPC member broker-dealers, or assets held at banks and savings associations, almost all of which carry FDIC insurance. Nor are they registered with the Bureau or any other securities regulatory authority, or exempt from registration. Despite the additional risk, and lack of safeguards and regulatory oversight, as of March 31, 2021, BlockFi held the equivalent of $14.7 billion from the sale of these unregistered securities in violation of the Securities Law.”

Kentucky falls along similar claims stating that BlockFi promotes up to 8.6% annual interest on parked crypto. Kentucky believes these savings accounts fall under the guise of securities as well, in the form of investment contracts.

In July, BlockFi stated that while New Jersey’s order calls for preventing the creation of all new BIAs, it has no impact on current BIA clients or any of their other products.

“We are fully operational for all of our existing clients worldwide, and you will continue to have access to all products, services, and assets on BlockFi.”

Both regulatory moves could be labeled as regulation by enforcement.

Meanwhile, savers can park dollars at their local bank and earn a negative real rate of return. Yes, bank deposits are insured, but the heightened yield provided to crypto investors holds a compelling offer on a risk-adjusted reward basis.

Meanwhile, BlockFi continues to offer BIAs in many jurisdictions.

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