SEC fines BlockFi $100 million For Unregistered Product Offerings

After agreeing to a settlement with the Securities and Exchange Commission (SEC), cryptocurrency lender BlockFi will pay $100 million in fines and charges in what is the first enforcement action taken by the US authorities against a cryptocurrency lending firm.

The Securities and Exchange Commission accused BlockFi Lending LLC (BlockFi) with breaching the Investment Company Act of 1940's registration rules by failing to register the offers and sales of its retail crypto lending product.

The company will pay a total of $100 million in penalties, including an additional $50 million in fines to settle similar charges brought by 32 states. It will also stop making unregistered offers and sales of the lending product BlockFi Interest Accounts (BIAs) and try to bring its operations into compliance with the Investment Company Act within 60 days.

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

As reported by the SEC, BlockFi was selling unregistered crypto interest accounts from March 4, 2019, until today, and was also selling BIAs to the general public throughout that time period. On its website, the firm provided inaccurate and deceptive statements for more than two years regarding the degree of risk in its loan portfolio as well as the hazards associated with lending, which was later shown to be untrue.

The SEC also found out that BlockFi functioned as an unregistered investment firm for more than 18 months, with more than 40% of its total assets (excluding cash) invested in investment instruments, which included loans of cryptocurrency assets to institutional borrowers.

BlockFi's reaction

BlockFi said in a blog post that it has secured an agreement with federal and state regulators in the United States in order to provide a clear route ahead for BlockFi and enabling Americans to earn cryptocurrency interest. The deal, according to the company, is a good indication since it was reached in order to provide the groundwork for the future development of its U.S. customers as well as the broader cryptocurrency sector.

As part of the settlement and without admitting or rejecting the SEC's allegations, BlockFi consented to a cease-and-desist order, which barred the company from breaching the Securities Act's registration and anti-fraud requirements, as well as the Investment Company Act's registration restrictions. The company has also committed to stop selling BIAs in the United States and will look to offer new financial product under the Securities Act of 1933.

In spite of the fact that BlockFi's customers living in the United States will continue to receive interest payments as they have in the past, they will no longer have the option of adding more assets to their BIAs.