BlockFi agreed to pay $100 Million in settlement following a U.S. Securities Exchange Commission charge that the company “failed to register the sales and offers of its retail crypto lending product.”
The news that had the space buzzing was broken by an SEC Document, followed by a dissenting note from Commissioner HesterM. Peirce. Both were posted on the SEC Website.
BlockFi’s Troubled Future
BlockFi offers interest-bearing accounts to deposit crypto currencies for many years. These accounts offered variable interest rates that were higher than any other product. They averaged 9% per year.
In a release, the SEC stated that the company had violated the Investment Company Act of 1940. It promised to pay interest on deposits but was not registered with the Commission.
BlockFi was first confronted by regulators last July when the New Jersey Bureau of Securities demanded that it refuse to accept payment from local customers for its BIA plan.
BlockFi was first reported by media outlets in November 2017 about the SEC’s decision to charge BlockFi for “unregistered crypto lending products” that earned high-yielding interest rates.
Details about the BlockFi SEC Settlement
BlockFi will pay $50m to the SEC as a penalty, and $50m to 32 states in which the platform is facing similar charges. BlockFi will no longer offer “unregistered sales and offers of the lending product.” BlockFi was also asked by the SEC to register its lending business under the Investment Company Act of 1940.
Gary Gensler, SEC chair, stated that this is the first such case in relation to crypto lending platforms. He elaborated, “Today’s settlement clearly shows that crypto markets must adhere to time-tested securities laws.”
According to a Financial Times report, more than half a million people had made investments in BlockFi totaling over $10 billion as of December 8, 2021. Bain Capital Ventures, Tiger Global Management and Tiger Global Management were the major investors in BlockFi’s $3 billion valuation as of March 2021.
Gurbir Grewal (Director of the SEC Enforcement Division) issued a warning to all players offering interest-bearing accounts that are not registered with SEC.
He stated that crypto lending platforms that offer securities such as BlockFi’s BIAs must immediately take notice of the resolution and comply with federal securities laws.
Is the SEC Action Clearing a Legal Grey Area
BlockFi’s $100 million fine and Commissioner Peirce’s passionate note calling the penalty “disproportionate” because it offered investors a healthy return was the main buzzword in the industry. There was a silver lining for some in the progress of the crypto industry.
BlockFi CEO Zac Prinse put out a series tweets and a note describing it as a big day for BlockFi’s interest-bearing product the BIA. Prince also explained the details of the settlement and how it affected or didn’t affect investors in the press release.
“BlockFi cooperated in the investigation by the government and took remediation steps. He stated that neither the SEC nor state-level agreements admit or deny wrongdoing or responsibility.
Jake Chervinsky (Head of Policy at Blockchain Association), made another noteworthy observation, noting that the SEC’s actions have in a manner facilitated “the path towards regulatory clarity.”
Chervinsky summarized Commissioner Peirce’s note of disapproval in simple language. “Comm’r Peirce eloquently disagrees and identifies what the main problem with BlockFi settlement is: the risk that the SEC says “you can offer the product if you register first” but then refuses to allow registration. A rug pull by the SEC, if you will. Let’s just hope this is not the case.
Marla Brooks – Financial Analysis
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