BlockFi to register crypto under securities laws

The US Securities and Exchange Commission has reached a settlement of $100 million with crypto lending platform, BlockFi, for violating securities laws. Not only is this settlement the largest of its kind to be recorded against a crypto firm, it is yet another move from the US regulator to bring cryptoasssets under the umbrella of securities laws.

In a press release, the SEC announced that it has agreed a $100m settlement with BlockFi Lending LLC for “failing to register the offers and sales of its retail crypto lending product”. It found that, between March 2019 and February 2022, BlockFi had offered BlockFi Interest Accounts (BIAs) to the general public. Through these accounts, investors had lent crypto assets to BlockFi and received a promise for a variable monthly interest payment in return.

The SEC found that BIAs are securities and, as such, BlockFi was required to register its offers and sales with the SEC. BlockFi had failed to register and did not qualify for an exemption from SEC registration. With this in mind, the SEC found that BlockFi has operated as an unregistered company for more than 18 months. It also found that BlockFi had made false statements regarding the level of risk surrounding its products.

In settling the case – which BlockFi has neither admitted or denied – the crypto firm has said it will now take steps to bring its business within the provisions of the Investment Company Act and, moreover, its parent company now intends to register under the Securities Act of 1993 under the umbrella of offering and selling a new lending product.

Commenting on the settlement, SEC Chair Gary Gensler – who famously takes a keen interest in the crypto landscape – said:

“Today’s settlement makes clear that crypto markets must comply with time-rested 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.”

Meanwhile Director of the SEC’s Division of Enforcement, Gurbir Grewal, encouraged similar firms to “take immediate notice of today’s resolution and come into compliance with the federal securities laws.”

CUBE comment

The SEC’s enforcement is landmark in more ways than one. Not only is it the highest amount issued by the SEC to a crypto firm to date, it is also the first instance in which Grewal has defiantly called on crypto firms to comply with existing securities laws.

The market for digital assets and cryptocurrency has been evolving rapidly over the last few years. What was initially seen as a libertarian alternative to traditional markets is now a thriving market of its own, embraced by many from experienced investors to new, financial unsavvy investors. With this, risk has emerged. Not only is there a lack of awareness around the risks and robustness of the crypto markets, but there is also a heightened potential for bad-actors and market manipulators in a previously unregulated (or ambiguously regulated) industry.

The SEC’s latest action is a bold step towards regulation for crypto markets, which will come as a relief for some – and present even more challenges for others. For the founders of such products the SEC’s comments will be a hard blow to take, with TechCrunch reporting that it has essentially “wiped out” the emerging decentralized finance (DeFi) ecosystem.

This is not the first time the SEC has moved to regulate emerging DeFi companies. Towards the end of 2021, Coinbase wrote in a blog that “the SEC has told us it wants to sue us over Lend” – Lend being a similar product to BIAs. At the time, Coinbase noted that “mystery and ambiguity only serve to unnecessarily stifle new products that customers want and that Coinbase and others can safely deliver”. In response to the SEC’s action against BlockFi, its Chief Executive, Zac Prince, has said it aims to “find the right path within whatever existing frameworks we need to facilitate the products and services that add value to our clients”. It appears that both companies welcome regulatory certainty, even if it does not go in their favour.

For the compliance team, this means one thing in particular: regulatory change and regulatory interpretation is incoming. In short, more work. At the moment, it looks as though the SEC are keen to bring crypto within the parameters of existing regulation. This broadly fits with messaging from the Office of the Comptroller of the Currency (OCC), who have said that regulators “cannot wait” to address crypto and encourage modernising the regulatory perimeter to cater for crypto and digital assets. Expanding existing frameworks may work for now, but be in no doubt that regulatory change is on the horizon.