Dive Brief:
- Cryptocurrency platform BlockFi will pay $100 million to the Securities and Exchange Commission (SEC) and 32 states in a settlement announced Monday. Under the deal, the company agreed to stop selling its current interest-bearing account product in the U.S. and sell a new one, BlockFi Yield, tailored to the Securities Act of 1933.
- Monday's agreement requires BlockFi to file a public registration statement that spells out how BlockFi Yield will work, along with its inherent risks. The SEC must review and sign off on the disclosure ahead of the product's launch.
- “Our DNA in general has not been where we are trying to fight these questions aggressively,” BlockFi CEO Zac Prince told The Wall Street Journal on Monday. “Our DNA is more, ‘let’s find the right path within whatever existing frameworks we need to facilitate the products and services that add value to our clients.’”
Dive Insight:
BlockFi will pay the SEC a $50 million penalty under Monday's agreement. The other $50 million will be split among the states.
The federal regulator charged the company with failing to register offers and sales of its BlockFi Interest Accounts. Under Monday's agreement, BlockFi will halt new offers and sales in the U.S. The company will continue to operate existing interest-bearing accounts, but it won't accept new investments into them. BlockFi agreed to align its business to the tenets of the 1940 Investment Company Act within 60 days.
BlockFi's interest-bearing accounts drew more than 570,000 users by December 2021, according to the Financial Times. But at least two state regulators last summer ordered BlockFi to stop offering the accounts to their residents. Several other states had questions for the company.
Over the past few months, the SEC has ramped up its efforts to police interest-bearing accounts. One gripe among companies that have found themselves in the agency's cross-hairs is that the regulator uses near-90-year-old case law to justify its actions.
“Laws drafted in the 1930s to facilitate effective oversight of our financial system could not contemplate this technological revolution,” Coinbase wrote in an October policy statement. “Forcing the full spectrum of digital assets into supervisory categories codified before the use of computers risks stifling the development of this transformational technology, thus pushing offshore the innovative center of gravity that currently sits in the United States.”
A month earlier, the company's CEO, Brian Armstrong, accused the SEC of "engaging in intimidation tactics behind closed doors." Another executive said the regulator threatened to sue Coinbase if it followed through on a plan to launch an interest-yielding product called Lend. The company scrapped the product but maintained that Lend would not have been a security because it wouldn't have represented an investment contract.
SEC Chair Gary Gensler on Monday said the BlockFi settlement "makes clear that crypto markets must comply with time-tested securities laws. ... It further demonstrates the Commission’s willingness to work with crypto platforms to determine how they can come into compliance with those laws."
BlockFi sold its interest-bearing accounts to U.S. residents for nearly three years. The SEC found the products to be securities, and that the company failed to register with the SEC or qualify for an exemption.
The regulator also found BlockFi operated for more than 18 months as an unregistered investment company because it issued securities and held more than 40% of its total assets, excluding cash, in investment securities, including loans of crypto assets to institutional borrowers.
Further, the SEC said company made a false and misleading statement on its website for more than two years — namely, that institutional borrowers typically posted an amount of collateral that was greater than their loan.
BlockFi neither admitted nor denied the SEC's findings.
'Land grab'?
Coinbase has long said the SEC refuses to give the digital asset industry an opinion in writing as to which products should be allowed and why — asserting the tactic as a "land grab" by the regulator.
Some Republican lawmakers have indirectly accused the SEC of reaching outside its lane. Gensler, in a September hearing, told lawmakers, “We just don’t have enough investor protection in crypto finance, issuance, trading or lending,” likening the space to “the Wild West or the old world of ‘buyer beware’ that existed before the securities laws were enacted.”
“As to the people and the companies that you regulate as chairman of the SEC, do you consider yourself to be their daddy?” Sen. John Kennedy, R-LA, asked Gensler at the hearing.
The long-running issue is whether or how interest-bearing accounts qualify as securities. A 1946 Supreme Court case determined that an investment contract, by the Securities Act's standard, is one in which "a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party."
In the case, which established the "Howey test," investors bought rows of orange trees in Florida and agreed to let the Howey Company manage the trees, harvest and sell the fruit, and give investors a share of the proceeds. By that measure, a Bloomberg op-ed writer said in July, the oranges, trees and land are not securities, but the agreement is.
BlockFi and Coinbase are not the only alleged targets. Digital-asset lender Celsius, along with crypto firms Gemini and Voyager Digital, have found themselves subject to similar SEC scrutiny, Bloomberg reported last month. Some of the same states that questioned BlockFi's interest-bearing accounts sought similar restrictions against Celsius products.
A Gemini spokeswoman last month told the wire service the company was cooperating with an “industry-wide inquiry” into interest-bearing accounts. Celsius said it was working with regulators to “operate in full compliance with the law.” A Voyager spokesman said such ongoing communications with government agencies are routine.
Bloomberg first reported the impending BlockFi settlement Friday.
