SEC Orders BlockFi to Pay $100 Million in Penalties

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The Securities and Exchange Commission (SEC) charged Peter Thiel-backed BlockFi with failing to register the offers and sales of its retail crypto lending product, and the company agreed to pay a $50 million penalty and an additional $50 million in fines to 32 states to settle similar charges, according to Feb. 14 press release from the SEC.

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In addition, to settle the SEC’s charges, BlockFi agreed to cease its unregistered offers and sales of its lending product, BlockFi Interest Accounts (BIAs), and attempt to bring its business within the provisions of the Investment Company Act within 60 days.

“This is the first case of its kind with respect to crypto lending platforms,” SEC Chair Gary Gensler said in the announcement. “Today’s settlement makes clear that crypto markets must comply with time-tested 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. I’d like to thank and commend our remarkable SEC staff and state regulators for their efforts and collaboration on this settlement.”

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As part of this resolution, BlockFi intends to file or confidentially submit a registration statement on Form S-1 with the SEC for the offering of BlockFi Yield (BY), which is anticipated to be the first SEC-registered crypto interest-bearing security, BlockFi said in a statement on its website.

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According to the SEC’s order, from March 4, 2019 until present BlockFi had offered and sold BIAs to the public. Through BIAs, investors lent crypto assets to BlockFi in exchange for the company’s promise to provide a variable monthly interest payment, the SEC said. The order finds that BIAs are securities under applicable law, and the company therefore was required to register its offers and sales of BIAs — but failed to do so, or to qualify for an exemption from SEC registration. Additionally, the order finds that BlockFi operated for more than 18 months as an unregistered investment company because it issued securities and also held more than 40% of its total assets, excluding cash, in investment securities, including loans of crypto assets to institutional borrowers.

The order also finds that BlockFi made a false and misleading statement for more than two years on its website concerning the level of risk concerning its loan portfolio and lending activity, according to the SEC.

“From the day we started BlockFi, we have always known that strong engagement with regulators would be critical for the adoption of financial services powered by cryptocurrencies,” Zac Prince, CEO and founder of BlockFi, said in a statement. “Today’s milestone is yet another example of our pioneering efforts in securing regulatory clarity for the broader industry and our clients, just as we did for our first product — the crypto-backed loan. We intend for BlockFi Yield to be a new, SEC-registered crypto interest-bearing security, which will allow clients to earn interest on their crypto assets.”

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SEC commissioner Hester Pierce released a statement as well, asking whether “the approach we are taking with crypto lending [is] the best way to protect crypto lending customers?  I do not think it is, so I respectfully dissent.”

“As an initial matter, 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,” Pierce said in the statement. “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 them or failed to return the crypto lent to it.  BlockFi’s misrepresentations about over-collateralization are serious, but the combined $100 million penalty nevertheless seems disproportionate.”

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About the Author

Yaël Bizouati-Kennedy is a full-time financial journalist and has written for several publications, including Dow Jones, The Financial Times Group, Bloomberg and Business Insider. She also worked as a vice president/senior content writer for major NYC-based financial companies, including New York Life and MSCI. Yaël is now freelancing and most recently, she co-authored  the book “Blockchain for Medical Research: Accelerating Trust in Healthcare,” with Dr. Sean Manion. (CRC Press, April 2020) She holds two master’s degrees, including one in Journalism from New York University and one in Russian Studies from Université Toulouse-Jean Jaurès, France.
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