BlockFi Settles $100M with the SEC, Brings Tension to Crypto Firms

Crypto lending platform BlockFi reportedly settled a years-long dispute with the Securities and Exchange Commission (SEC) and state governments over claims that its product offered illegal securities. 

BlockFi paid $100 million – $50 million to the SEC and $50 million to 32 states –  to settle legal accusations related to its BlockFi Interest Account (BIA). This marks the largest penalty against a crypto firm ever, which also acts as an explicit warning to other crypto lenders. 

BlockFi violated three sections of federal securities laws. These sections include selling unregistered securities, carrying on business as an unregistered investment company, and making misleading statements on its website that loans were overcollateralized. BlockFi denied the allegations but was ultimately found guilty.

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

“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,” he added.

BlockFi would have faced a much higher fine had it not cooperated, according to the SEC. This is because, from May 2019 through June 2021, less than a quarter of the loans were actually overcollateralized, and the company underestimated the risks of lending crypto assets. For the unacquainted, that’s very bad. It also shakes trust in crypto. 

The New Jersey-based crypto giant has agreed to stop offering lending products and plans to register its high-yield interest accounts. BlockFi announced today it intends to formally register a new crypto lending product with the SEC, marking the start of the bureaucratic process of offering registered securities to the public.

The conclusion of this drama could spark more drama for BlockFi’s competitors – namely  Gemini, Celsius, OKCoin, and Voyager Digital. These companies stand to face scrutiny over their own lending products, even if they only intermediate the lending. The SEC raised questions about the practice, arguing that any lending-related product should be registered as a security. 

The SEC raised similar concerns when Coinbase planned to launch its crypto product, which the crypto exchange ultimately had to cancel because of increasing tensions with the regulatory body. This latest development indicates that launching crypto products without a green signal from the regulator is not going to be an easy task. 

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