US regulators have taken their first enforcement action on cryptocurrency lending, agreeing $100 million settlements with BlockFi for fees it offered interest-bearing accounts without registering them as securities.
The U.S. Securities and Exchange Commission announced on Monday that it has agreed to a $50 million settlement with the company, which will again pay the same amount to a group of 32 states.
The federal regulator said the case clarified a legal gray area over popular interest-bearing accounts tied to cryptocurrency lending products, and warned there could be more such cases if any. other lenders did not register with the commission. New Jersey-based BlockFi said it will soon offer the first interest-bearing crypto security registered with the SEC.
“This is the first such case involving crypto lending platforms,” said SEC Chairman Gary Gensler. “Today’s settlement makes it clear that crypto markets must comply with proven securities laws.”
Cryptocurrency lending has exploded with the recent rise of digital assets, with start-ups such as Celsius also offering high returns to users willing to deposit their tokens. Many decentralized finance programs also offer interest-bearing products without going through intermediaries such as banks.
BlockFi began selling its BlockFi Interest Accounts in March 2019, offering a variable interest rate on investors’ crypto assets.
As of Dec. 8 last year, 572,160 people had invested a total of $10.4 billion in BIAs, according to the SEC filing. BlockFi was valued at $3 billion last March by investors including Bain Capital Ventures and Tiger Global Management.
The SEC alleged that BlockFi broke the law by offering these accounts with a promise of regular interest payments, but without first registering with the commission.
Gurbir Grewal, Director of the SEC’s Enforcement Division, said: “Crypto lending platforms offering securities like BlockFi’s BIAs should immediately take notice of today’s resolution and comply with federal securities laws.”
BlockFi had previously insisted the account was “not a security” and was “lawful and appropriate for participants in the crypto market”.
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The case marks a new front in Gensler’s attempts to place the fast-growing cryptocurrency world under the purview of US regulators. He told the Financial Times last year that crypto trading platforms would need to be regulated to survive, urging such firms to register with the commission.
The SEC also alleged that BlockFi was making its product less risky than it was by saying its institutional loans were “generally” backed by more than enough collateral to cover any potential loss. In fact, the commission said, that was not the case for most of its institutional loans.
SEC officials said the penalty would have been much higher had the company not promptly cooperated with officials.
BlockFi, which has not admitted any wrongdoing, will continue to operate BIA accounts but will not accept any new investments in them. It is instead launching a new crypto account called BlockFi Yield, which will be registered with the SEC.
Zac Prince, Chief Executive Officer of BlockFi, said, “Today’s milestone is another example of our pioneering efforts to ensure regulatory clarity for the entire industry and our customers, just as we have done for our first product – crypto lending.
“We intend BlockFi Yield to be a new SEC-registered interest-bearing crypto security that will allow clients to earn interest on their crypto assets.”