Cryptocurrency Exchange to Pay $100 Million in Fines Over Lending Platform

BlockFi Lending has agreed to pay $100 million to settle charges that it violated securities laws by misrepresenting the risk involved in its cryptocurrency interest-bearing accounts, and for operating as an unregistered investment company for more than a year and a half.

The company agreed to pay a $50 million penalty to settle charges brought by the Securities and Exchange Commission, and to stop its unregistered offers and sales of its lending product, BlockFi Interest Accounts, also known as BIA. The company also said it would attempt to bring its business within compliance of the Investment Company Act within 60 days. Separately, BlockFi also agreed to pay an additional $50 million in fines to 32 states to settle similar charges.

“This is the first case of its kind with respect to crypto lending platforms,” SEC Chair Gary Gensler said in a statement. “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.”

According to the SEC’s cease-and-desist order, BlockFi offered and sold BIAs to investors, through which investors lent crypto assets to BlockFi in exchange for a variable monthly interest payment. BlockFi generated the interest paid out to BIA investors by deploying its assets in various ways, including loans of crypto assets made to institutional and corporate borrowers, lending US dollars to retail investors, and by investing in equities and futures.

As of Dec. 8, BlockFi and its affiliates held approximately $10.4 billion in BIA investor assets, and that figure was a high as $14.7 billion as of the end of March 2021.

The SEC argues that the BIAs were securities because they were notes BlockFi offered and sold as investment contracts. The regulator also accused BlockFi of having a materially false and misleading statement on its website for over two years concerning its collateral practices and, therefore, the risks associated with its lending activity.

BlockFi also operated as an unregistered investment company for more than 18 months, according to the SEC, as it was an issuer of securities engaged in investing, reinvesting, owning, holding, or trading in securities, and owned investment securities that exceeded 40% of its total assets in value. And the SEC said BlockFi violated the Investment Company Act when it engaged in interstate commerce without registering as an investment company with the SEC.

Without admitting or denying the SEC’s findings, BlockFi agreed to the cease-and-desist order prohibiting it from violating the registration and antifraud provisions of the Securities Act, and the registration provisions of the Investment Company Act. BlockFi also agreed to cease offering or selling BIAs in the US.

Earlier this month, the SEC issued an investor bulletin warning investors that interest-bearing accounts for crypto asset holdings are not as safe as bank or credit union deposits.

“Companies offering interest-bearing accounts for crypto assets do not provide investors with the same protections as do banks or credit unions, and crypto assets sent to those companies are not currently insured,” the SEC said in the bulletin. “As a result, you should not expect the same level of security, safety, and soundness with these crypto asset interest-bearing accounts that you have with bank or credit union deposits.”