BlockFi, the popular cryptocurrency savings and loans service, has agreed to pay a $100 million penalty to the SEC and 32 states to settle charges that it had been illegally operating as an unregistered investment company and misleading the public about the level of risk inherent to its business. The fine is the largest leveled against a cryptocurrency company by the SEC so far, according to Bloomberg.
The SEC charged BlockFi, one of the most popular entities in the burgeoning crypto loan industry, with not registering its so-called “BlockFi Interest Accounts” (BIAs) as securities. The product, on offer since 2019, allowed clients to deposit crypto and get a return in the form of a high-field interest rate. BlockFi then used that money to offer loans to retail and institutional clients. BlockFi claims to have over one million clients and manage more than $10 billion in assets.
The SEC decided that BlockFi's crypto loans business violated the law as the company had not registered as an investment company. The SEC additionally said that BlockFi additionally made “false and misleading” statements about “the level of risk in its loan portfolio and lending activity.”
In a statement, SEC Chair Gary Gensler called the settlement “the first case of its kind” and said it “makes clear that crypto markets must comply with time-tested securities laws.” BlockFi celebrated the deal in a release, saying it provided “regulatory clarity” for crypto companies.
As part of the deal, the company can no longer offer its lending product to U.S. clients, though current customers can continue to earn interest. It will also apply to register a new crypto lending product called BlockFi Yield that will be in line with securities regulations, which BlockFi said will be “the first SEC registered crypto interest-bearing security.” When the product is registered, clients with BIAs will have the option to transition over, according to the company.
The situation had drawn interest from those in the cryptocurrency sphere since several states first started taking issue with BlockFi last year and alleging that it is selling unregistered securities. Crypto lawyer Preston Byrne, a partner at Anderson Kill, told Motherboard then that the enforcement action “will be interpreted by other companies offering similar products as a warning shot.”
Coinbase, the largest U.S.-based cryptocurrency exchange, itself stated last September that it planned for a regulatory fight over its own proposed high-yield cryptocurrency loans after the SEC told the company that it planned to sue should Coinbase launch the product. Coinbase nixed that product launch, but eventually began offering something similar for non-U.S. customers.
BlockFi, which has received more than $500 million in funding, did not need to admit to wrongdoing as part of the deal.