UPDATE: July 23, 2021:  Two more states brought regulatory concerns over BlockFi’s interest accounts (BIA) in the wake of the order New Jersey’s securities regulator filed Tuesday.

The Texas State Securities Board on Thursday issued a cease-and-desist order aimed at stopping the company from offering state residents its interest-bearing accounts. The order, published by CoinDesk, allows BlockFi to continue operations through an October hearing — at which point a judge may sign off on the order alleging the offering violates state securities laws. The filing gives BlockFi a chance to formally respond to the Texas regulators.

Meanwhile, the Alabama Securities Commission on Wednesday gave BlockFi 28 days to show why it should be allowed to continue selling its interest accounts to state residents, saying the product is not registered with the state regulator.

“We are in active dialogue with multiple regulators to demonstrate that the BlockFi Interest Account (BIA) is not a security and should not be regulated as one,” BlockFi tweeted Thursday. “We firmly believe that the BIA is lawful and appropriate for crypto market participants, and we remain steadfast in our commitment to fight for consumers’ rights to earn interest on their crypto assets.”

Dive Brief:

• New Jersey’s Bureau of Securities ordered cryptocurrency platform BlockFi, effective Thursday, to stop offering new interest-bearing accounts to residents of the state. The order does not affect the company’s existing BlockFi Interest Accounts.
• “Our rules are simple: if you sell securities in New Jersey, you need to comply with New Jersey’s securities laws,” Acting Attorney General Andrew Bruck said in a statement Tuesday. “No one gets a free pass simply because they’re operating in the fast-evolving cryptocurrency market.”
• The enforcement action comes amid growing concern for consumer safety as decentralized finance platforms offer elevated yields but represent a risk to users because losses are not insured by the Federal Deposit Insurance Corp. (FDIC) or protected by the Securities Investor Protection Corp. (SIPC).

Dive Insight:

At the root of the enforcement action is the definition of a security. A 1946 Supreme Court case established what’s become known as the Howey test — named for W.J. Howey, a real estate developer and citrus grower whose eponymous company was the defendant in the case. The court determined an “investment contract,” by the standard of the Securities Act, 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, 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 this week, the oranges, trees and land are not securities, but the agreement is.

BlockFi lets investors buy a BlockFi Interest Account by depositing certain eligible cryptocurrencies with the company, according to the New Jersey order. BlockFi then pools the deposits to fund its crypto lending and proprietary trading businesses. Investors are paid monthly in cryptocurrency, and the yield can range from 0.25% to 7.5%, depending on how much is deposited and in which token, the order said. By comparison, the average savings account yields 0.06% interest, Forbes reported, citing FDIC figures, while 10-year treasury notes yield 1.19%.

By the Howey test, the token is not the security, but buying the token, letting a third party pool and manage it, then collecting a yield from that pool would be, the Bloomberg op-ed writer asserted.

Still, comments and actions by the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) indicate regulators may be leaning toward considering some established crypto assets such as Bitcoin and Ether as commodities rather than securities.

But newer denominations may fall in a gray area. One sticking point may stem from centralization or the lack of it. Uniswap, for example, is a decentralized exchange, and that lack of centralization may prove difficult for regulators to police. BlockFi, however, is a centralized company that less than a month ago, according to TheBlock, added UNI — a token tied to Uniswap — as an eligible currency for its interest accounts.

BlockFi said it disagrees with New Jersey’s order because the accounts are not securities, adding, in a statement seen by Reuters, that its products are "lawful and appropriate for crypto market participants.”

'Play[s] by the rules'

The state, in its order, took issue with advertising on BlockFi’s website indicating the company is a “US regulated” entity that “play[s] by the rules.”

BlockFi’s website advises dissatisfied investors to reach out to the company’s customer service online before contacting their local jurisdiction to file a complaint, the New Jersey order said. The site then lists state banking regulators and their contact information but fails to explain that state banking regulators do not license the interest accounts.

Nor does BlockFi specify that the interest accounts are not registered — or exempt from registration — with New Jersey’s Bureau of Securities or any other securities regulator, the state said.

BlockFi does not offer its interest accounts to residents of all jurisdictions, the state said, citing New York as a state where the product is not available — “presumably because of the laws in those jurisdictions,” New Jersey’s Office of the Attorney General wrote in a Tuesday press release.

“Cryptocurrency investment products offered and sold on decentralized finance platforms carry significant risks, even beyond those associated with the volatility of cryptocurrency,” Kaitlin Caruso, acting director of New Jersey’s Division of Consumer Affairs, said in the release. “Platforms like BlockFi may mirror the traditional financial structures that we know and trust, but in reality they can leave investors extremely vulnerable.”

New Jersey is hardly the first jurisdiction to take action against a crypto platform.

The U.K.’s Financial Conduct Authority last month ordered the world’s largest crypto exchange, Binance, to stop all regulated activities in the country.

Cryptocurrency exchange Bitfinex and the stablecoin Tether agreed in February to end all trading activity with residents of New York as part of a settlement that cost the entities $18.5 million over allegations they hid the loss of commingled client and corporate funds and lied about their reserves.

“When it comes to cryptocurrency financial products, we urge investors to look beyond the promise of heightened returns and approach them with extreme caution,” Christopher W. Gerold, chief of New Jersey’s Bureau of Securities, said in Tuesday’s release.

BlockFi’s interest-bearing accounts have raised $14.7 billion from investors, the state said Tuesday.