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Finance & Tax


SEC, STATES HIT CRYPTO LENDER BLOCKFI WITH $100M PENALTY

The SEC announced the settlement the morning after a Super Bowl broadcast that
was chockablock with expensive ads for crypto exchanges and trading platforms.



The SEC accused BlockFi of defrauding investors and selling billions of dollars
in unlicensed investment products over the last three years.

By Sam Sutton

02/14/2022 11:11 AM EST

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The Securities and Exchange Commission and 32 states said Monday that
cryptocurrency startup BlockFi will pay $100 million to settle charges that it
operated an illegal lending business, in what officials called a
first-of-its-kind crackdown in digital asset trading.

The SEC said its $50 million piece of the settlement was the agency’s biggest
penalty yet against the fast-growing cryptocurrency industry, which is the
subject of growing scrutiny from lawmakers and regulators. The SEC announced the
settlement the morning after a Super Bowl broadcast that was chockablock with
expensive ads for crypto exchanges and trading platforms.



The SEC accused BlockFi of defrauding investors and selling billions of dollars
in unlicensed investment products over the last three years. Under the terms of
the settlement, BlockFi agreed to stop opening new lending accounts to U.S.
customers and to register a new product, known as BlockFi Yield, as an
SEC-regulated investment company. SEC officials told reporters Monday that the
penalty would have been larger if the Jersey City, N.J.-based company hadn’t
cooperated with its investigation.

“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. It further
demonstrates the commission’s willingness to work with crypto platforms to
determine how they can come into compliance with those laws.”



BlockFi will pay $50 million to settle similar claims brought by law enforcement
and securities regulators in 32 states. BlockFi did not admit or deny
wrongdoing.

Founded in 2017, BlockFi’s popularity exploded after it began offering its
interest-bearing accounts that allowed investors to earn yield on their crypto
holdings. BlockFi would then lend out those digital assets to other investors or
use them to purchase traditional investment products.

The company’s promise of high yields drew in hundreds of thousands of customers—
including nearly 400,000 in the U.S. — with total assets pegged at more than $10
billion as of December.

Its claims about the safety of the reserves backing its loans were often
misleading and overstated, according to the SEC’s enforcement order. The agency
said the interest-bearing accounts — known as BlockFi Interest Accounts —
represented unregistered securities.

Despite the hefty civil penalties, BlockFi celebrated the SEC’s order for giving
it a path forward as a regulated entity. Existing U.S. customers will be able to
transfer holdings from their BlockFi Interest Accounts to the new BlockFi Yield
product once the company completes its SEC registration process.

“From the day we started BlockFi, we have always known that strong engagement
with regulators would be critical for the adoption of financial services powered
by cryptocurrencies,” BlockFi founder and CEO Zac Prince said in a statement.
“Today’s milestone is yet another example of our pioneering efforts in securing
regulatory clarity for the broader industry and our clients, just as we did for
our first product — the crypto-backed loan.”


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