Crypto lending platform BlockFi will pay the U.S. Securities and Exchange Commission (SEC) $100 million in a settlement over claims that the company violated securities law through its interest account offering, the regulator announced today. The settlement represents the largest recorded penalty incurred by a crypto firm, Axios first reported.
BlockFi will pay $50 million of the penalty directly to the SEC and the other $50 million in the form of fines to 32 U.S. states to settle similar charges, according to the SEC's statement.
"Adherence to our registration and disclosure requirements is critical to providing investors with the information and transparency they need to make well-informed investment decisions in the crypto asset space," said SEC enforcement director Gurbir S. Grewal.
BlockFi has raised $450 million in funding from investors since its inception. Its latest round was a $350 million Series D last March that valued the company at $3 billion, led by Bain Capital Ventures, partners of DST Global, Pomp Investments and Tiger Global.
The company's interest accounts allowed users to earn a monthly interest payment amounting to up to 9.25% APY on cryptocurrency they held, according to BlockFi's website. Under the new SEC ruling, BlockFi's accounts are considered securities because their users lend currency to the firm.
BlockFi also illegally operated for 18 months as an investment company, the SEC said. During this period, the company issued securities and met an asset-based threshold qualifying it as an investment company -- despite not being registered as such.
In addition to the registration issues, the SEC claims BlockFi misled investors about the level of risk in its loan portfolio and lending activity.
As part of the settlement, BlockFi agreed to cease sales of its unregistered lending product. It also announced today its intent to register a new, compliant lending product, called BlockFi Yield, which it says would be the first SEC-registered crypto interest-bearing security.
The news comes as a huge blow to the emerging crypto lending ecosystem, digital asset attorney Max Dilendorf told TechCrunch, saying the SEC has essentially "wiped out" the crypto lending business model with its action against BlockFi.
If a crypto company wanted to continue selling interest-bearing products, it would need to essentially make disclosures like a publicly-traded company would by filing an S-1 registration statement, Dilendorf said. Filing an S-1 statement can be a costly process, requiring investors who buy into the interest-bearing products to be accredited unless they seek (and win) specific exemptions, he added.
For smaller players in the space, the regulatory burden of the new rules and their associated cost could be crippling.
“BlockFi can probably afford to go forward with [offering registered securities] even though the outcome is not certain, because it’s a $3 billion company,” Dilendorf said. “What about a smaller DeFi protocol? They are going to get wiped out if they become targets of similar enforcement action.”
Update: TechCrunch has changed the language in this article to reflect that BlockFi is a centralized crypto lender, wherein assets are held with a custodian on the BlockFi platform, rather than a decentralized finance (DeFi) protocol. The headline has also been updated to reflect this. We also clarified the implications of crypto companies filing S-1 documentation with the SEC.
BlockFi founder and CEO Zac Prince wrote in a statement in response to the SEC action: “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. 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. We intend for BlockFi Yield to be a new, SEC-registered crypto interest-bearing security, which will allow clients to earn interest on their crypto assets.”