BlockFi, a top crypto platform that provides crypto lending services, has settled with the Securities and Exchange Commission following an investigation into the company’s activities. The settlement was leaked last week and BlockFi will be paying a total $100 million penalties. There were no allegations of fraud.
Without admitting or denying the SEC’s findings, BlockFi also agreed to a cease-and-desist order.
The SEC charged BlockFi with with failing to register the offers and sales of its retail crypto lending product. The SEC also charged BlockFi with violating the registration provisions of the Investment Company Act of 1940.
To settle the SEC’s charges, BlockFi agreed to pay a $50 million penalty, cease the unregistered offers and sales of the lending product BlockFi Interest Accounts (BIAs).
The SEC states that BlockFi must “attempt to bring its business within the provisions of the Investment Company Act within 60 days.”
BlockFi’s parent company also announced that it intends to register under the Securities Act of 1933 the offer and sale of a new lending product. In parallel actions announced today, BlockFi agreed to pay an additional $50 million in fines to 32 states to settle similar charges.
SEC Chairman Gary Gensler commented in the settlement:
“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. It further demonstrates the Commission’s willingness to work with crypto platforms to determine how they can come into compliance with those laws. I’d like to thank and commend our remarkable SEC staff and state regulators for their efforts and collaboration on this settlement.”
The North American Securities Administrators Association (NASAA), the group that represents state securities regulators, also issued a statement on the settlement noting that thirty-two state securities regulators have agreed to the terms of a settlement with BlockFi to resolve its past unregistered activities with more jurisdictions expected to follow.
Joseph P. Borg, NASAA Enforcement Section Committee Chair and Alabama Securities Commission Director, said:
“State securities regulators recognize the potential value of new technology for the benefit of Main Street investors, but this new technology needs to be balanced with appropriate laws and regulations. This settlement recognizes the important work of state securities regulators and the SEC in making sure that those who are investing their hard-earned money understand the risks and rewards of their decisions.”
A statement on the BlockFi website notes that as of February 14, 2022, the BlockFi Interest Account (BIA) is no longer available to new clients who are US persons or persons located in the US, and existing US clients with BIA accounts are unable to transfer new assets to their BIAs.
The SEC claims that from March 4, 2019, until today, BlockFi offered and sold BIAs to the public. Through BIAs, investors lent crypto assets to BlockFi in exchange for the company’s promise to provide a variable monthly interest payment. The SEC’s order finds that BIAs are securities under applicable law, and the company therefore was required to register its offers and sales of BIAs but failed to do so or to qualify for an exemption from SEC registration.
Additionally, the SEC’s order finds that 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.
The order also finds that BlockFi made a false and misleading statement for more than two years on its website concerning the level of risk in its loan portfolio and lending activity.
On the BlockFi website, the company notes that investors can earn up to 9.25% APY via a BIA with interest accruing daily and paid monthly along with no minimum balances. BlockFi manages over $10 billion in assets.