BlockFi, the popular cryptocurrency savings and loan service, has agreed to pay a $100 million fine to the SEC and 32 states to settle charges that it had operated illegally as an unregistered investment company and misled the public about the level of risk inherent in its activities. The fine is biggest leveled against a cryptocurrency company by the SEC so far, according to Bloomberg.
The SEC has accused BlockFi, one of the most popular entities in the nascent crypto lending industry, of failing to register its so-called “BlockFi Interest Accounts” (BIAs) as securities. The product, offered since 2019, allowed customers to deposit crypto and earn a return in the form of a high interest rate. BlockFi then used this money to offer loans to retail and institutional customers. BlockFi claims to have over a million customers and manage over $10 billion in assets.
The SEC ruled that BlockFi’s crypto lending business violated the law because the company had not registered as an investment firm. The SEC further said that BlockFi also made “false and misleading” statements about “the level of risk in its loan portfolio and lending activity.”
In a statement, SEC Chairman Gary Gensler called the settlement a “first case of its kind” and said it “makes it clear that crypto markets must comply with proven securities laws.” . BlockFi celebrated the deal in a statement, saying it was providing “regulatory clarity” for crypto companies.
As part of the agreement, the company can no longer offer its loan product to US customers, although current customers can continue to earn interest. It will also apply to register a new crypto lending product called BlockFi Yield that will comply with securities regulations, which BlockFi says will be “the first interest-bearing crypto security registered with the SEC.” When the product is registered, customers with BIA will have the option to transition ondepending on the company.
The situation had sparked interest from players in the cryptocurrency sphere since several states began challenging BlockFi last year and alleged it was selling unregistered securities. Crypto attorney Preston Byrne, a partner at Anderson Kill, told the motherboard then that the enforcement action “will be interpreted by other companies offering similar products as a warning shot”.
Coinbase, the largest US-based cryptocurrency exchange, itself declared last september that it was planning a regulatory fight over its own proposed high-yield cryptocurrency loans after the SEC informed the company that it planned to sue if Coinbase launched the product. Coinbase canceled this product launch, but finally started offering something similar for non-US customers.
BlockFi, which received more than $500 million in funding, did not need to admit any wrongdoing under the deal.