Commissioner Hester Peirce has once again come to the defense of a Fintech innovator pertaining to the settlement announced today in regards to BlockFi – a large crypto platform. As was reported earlier, BlockFi must pay $100 million in penalties to both the SEC and state regulators due to its crypto lending business. There were no claims of harm in regards to the platform’s investors that have grown rapidly in recent years with assets being managed measured in the billions of dollars.
The first action of its kind against a crypto lender, Commissioner Peirce chastised the Commission for its inclination to regulate by enforcement stating:
“Is the approach we [the SEC] are taking with crypto lending the best way to protect crypto lending customers? I do not think it is, so I respectfully dissent.”
As part of the minority on the Commission, Peirce’s dissent does little beyond publicly disagreeing with the leadership’s actions but she does advocate there could be an alternative approach towards crypto platforms like BlockFi – that aim to provide a valued service.
Commissioner Peirce says:
“… it is difficult to understand how the civil penalty will protect investors. BlockFi will pay the SEC $50 million, and will pay another $50 million in connection with state settlements for the same conduct. While penalties this size are intended to deter bad conduct, here there is no allegation that BlockFi failed to pay its customers the money due to them or failed to return the crypto lent to it. BlockFi’s misrepresentations about over-collateralization are serious, but the combined $100 million penalties nevertheless seems disproportionate.”
Noting that BlockFi is in the process of filing a registration statement, Commissioner Peirce states that “it is still worth asking whether a framework other than the securities regulatory framework might be better suited to getting customers transparency around the terms and risks of crypto lending products.”
“BlockFi will not be allowed to take in any additional crypto from retail investors until the company has registered a new crypto lending product on Form S-1. 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. Even assuming BlockFi perseveres and prevails in the S-1 registration process, before it can restart its lending program, it has to leap through another regulatory hoop—the Investment Company Act. The Commission has found that BlockFi operated as an unregistered investment company. Yet BlockFi cannot register as an investment company since it issues debt securities, and so it needs an exemption or exclusion from registration. The Order Instituting Proceedings also specifically discusses the market intermediary exclusion. 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. The Commission’s lack of experience with the market intermediary exclusion combined with the nature of BlockFi’s business suggests that the sixty-day timeframe (even if extended an additional 30 days) allocated for BlockFi to “provid[e] the Commission staff with sufficient credible evidence that it is no longer required to be registered under the Investment Company Act” is extremely ambitious.”
BlockFi’s path going forward will be a journey that will not be quickly accomplished – at least for US investors interested in utilizing the income-generating BlockFi Interest Account – a service that, until recently, was apparently generating a 9.25% APY.
The SEC has long told Fintech innovators to come in and speak to them for feedback. It appears that BlockFi may have done so – only to be hit with a multi-million dollar penalty instead of a mutually agreeable path that appeases security regulators. Commissioner Peirce adds:
“….a company that tries to do the right thing should be met across the table by a regulator that tries to get to a sensible result in a reasonable timeframe. For the sake of the American public, our own reputation, and the companies that heed our call to come in and talk to us, we need to do better than we have so far at accommodating innovation through thoughtful use of the exemptive authority Congress gave us.”
It is a good and important read. The SEC should do more to work with prudent innovators. The entire statement is available here.