BlockFi was ‘the sacrificial lamb’ for crypto regulation, Decrypt Editor-in-Chief says

Decrypt Editor-in-Chief Dan Roberts joins Yahoo Finance Live to discuss how BlockFi agreed to settle with the SEC for $100 million and the outlook for crypto regulation.

Video Transcript

RACHELLE AKUFFO: Welcome back. You're watching Yahoo Finance Live. And we're going to take a quick check on what's going on with cryptos today. They seem to be faring a lot well, as some of that risk easing from Ukraine-Russia tension seems to have helped, as well as some news out of Europe. We're seeing Bitcoin up significantly, last price at 44,000. For more on what's happening with crypto, let's turn it to Brad.

BRAD SMITH: All right, thanks so much. Well, crypto regulation is what we've been tracking here. And Dan Roberts, Decrypt editor-in-chief, joins us now to discuss this even further. Dan, as crypto acceptance ramps and the ad campaigns ensue, the regulation, which the space has been looking for, largely hasn't kept pace. But recently, we saw BlockFi reach a $100 million settlement with the SEC. And it raises this question of whether legal precedent will be set on a case by case basis, instead of sweeping regulation outright.

DAN ROBERTS: Well, Brad, I mean, BlockFi chose to ask for forgiveness rather than permission. BlockFi is one of a few companies, along with Celsius and Nexo, that is offering these high yield crypto savings accounts. So customers deposit a little bit of crypto, or you can deposit a stablecoin. They are, in turn, lending that crypto out to other crypto companies and protocols at higher rates, and they give you back high yield. Now the SEC had basically made it clear that they view those as unregistered securities. So now you have the $100 million settlement for BlockFi.

What's funny is you see the BlockFi executives out there in the last couple of days trying to frame this as a win and a positive. This is great for the space. And maybe that's true, but it is also the case that they got in trouble and they got fined. It's $50 million to the SEC and $50 million to a number of states that had taken issue with this product. For now, they're not going to be able to onboard new accounts in the US. But those who are grandfathered in and already have a BlockFi account can continue to earn yield.

Now you're on to something. What's interesting here is they might be lighting the way for other companies to get away with these products if they work hand in hand with the SEC. But of course, that's something that crypto companies do not love the idea of and don't want to do. I mean, in Coinbase's case, when Coinbase had announced a new product that looked a lot like these BlockFi accounts, it was called Lend. The SEC threatened to sue, and Coinbase said never mind and shut it down.

So some companies are going to say, basically, thank you, BlockFi. Maybe we can do the same product if the SEC approves us. Others are going to say, well, this isn't much of a win because the SEC is going to totally clamp down and require KYC, Know Your Customer, and AML, Anti-Money Laundering. And it's also unlikely that DAOs, Decentralized Autonomous Organizations, are going to do well if they have to work hand in hand with the SEC. But it certainly is a pivotal moment that we'll have to keep watching, see how long it takes now for SEC to approve BlockFi to bring on new customers.

BRAD SMITH: And so I think you raise a great point as well. Do you believe that the misrepresentations about overcollateralization, which is what the SEC had pointed out, do you believe it's specific to BlockFi? Or does this render concerns that other Bitcoin lending practices are operating similarly?

DAN ROBERTS: Yeah, I think BlockFi was just kind of the sacrificial lamb, the first out the gate. A number of these other companies are certainly watching closely. Their products are basically the same. They vary in the details. Some of them allow you to deposit one of eight different cryptocurrencies. Some of them, it's only Bitcoin and Ethereum. They vary in the details. But I think the SEC, probably, it's safe to bet has the same view on all of these products. They see them as securities.

And that doesn't mean that they're saying that they're illegal, but they need to be registered. So if you've been offering unregistered securities, you better register them with the SEC and pay a fine. They're basically saying, you've broken the law. Of course, when you come to one of these settlements, like BlockFi did, you admit no wrongdoing. So again, the executives get to trot out and say, this is great. Look at us. We've come to terms with the SEC. Mm, that and paying $100 million.

But it's going to be really interesting. And, you know, the lawmakers, especially Democrats like maybe not Biden himself, although we can surmise what his view is, but Elizabeth Warren, Gary Gensler, they all seem to think that the crypto space is rife with these tokens that are unregistered securities offerings and with products that might lead regular uninformed investors to lose their shirts.

BRAD SMITH: And so let's go overseas. In Europe, Fidelity's first exchange traded product pegged to the price of Bitcoin, that's set to be listed. What type of volume should we expect for the ETP overseas in comparison to some of the spot ETFs that we've seen from ProShares, that we've seen this from Valkyrie as well, listed during 2021?

DAN ROBERTS: Well, and the distinction that we should draw, Brad, is in the US, we still haven't had a spot ETF, an ETF that is tied to the current price of Bitcoin. That is what people have wanted for a long time. The SEC won't do it or hasn't yet. What the SEC approved in the US was the ProShares ETF and others that are tied to futures contracts. So you're betting on the future price of Bitcoin, which is kind of a workaround. It's a little bit of a mature investing product that regular folks, most retail investors, probably don't understand and probably shouldn't mess with.

This Fidelity ETP in Europe, so not in the US, is essentially a Bitcoin spot ETF. You are betting on physical Bitcoin. That is the current price of Bitcoin. And I think people are excited about it. You know, look, even BITO, the ProShares one, which, again, was kind of a workaround, did very, very big volume on its first day of trading. So because you've got Fidelity, a known household name, I expect it to do pretty big volume. But again, it's not in the US. And in the US, we still don't really have the spot Bitcoin ETF that people have clamored for, for years.

BRAD SMITH: Right, right, and so then additionally, here, one other major crypto story that we've been tracking, and I believe you guys have written about this as well, the Canadian government's invocation of the Emergencies Act, cutting off crypto-linked accounts. It seems the weeks-old trucker protest and the economic impudence from it is now turning into a flashpoint for DeFi regulation with appropriate oversight without overreach here. And so now it's for this flashpoint. How do other nations also-- how are they also watching this very closely to figure out how they can have appropriate oversight without overreach?

DAN ROBERTS: Well, just so people understand here, Brad, I mean, this was a group of anti-vax protesters, truck drivers, in Canada who were protesting the vax mandate. And what happened first is that they raised money on GoFundMe. And then the government stepped in and shut down their GoFundMe accounts. That's when they turned to Bitcoin. They raised a lot of money for their efforts in Bitcoin, and Elon Musk was one of many people who tweeted, supporting their efforts. And so that's just interesting even regardless of your politics.

Now the Canadian government steps in and is going to freeze the bank accounts of some of these people. Now this isn't just a crypto story. I mean, they're freezing their bank accounts. So this is all funding, but they're trying to stop them from being able to access their funds. So, you know, if you use an exchange and you are connected to the exchange through your bank account and you hold certain Bitcoin that you've raised as part of your protest, now you can't access it because you can't access your account.

So a lot of people do see this as overreach, but the interesting thing is that Bitcoin advocates love this story because they think it's a great advertisement for Bitcoin. It's an advertisement for decentralization. You know, this is why people who were early to crypto who are libertarians like it because the government can't step in and freeze your accounts or mess with your Bitcoin. Of course, if you store your crypto on a centralized exchange, well, maybe they can. So it is a flashpoint. You're right. Politics are involved. COVID's involved. It's going to continue to be a big story.

BRAD SMITH: Dan Roberts, Decrypt editor-in-chief, joining us here today to break down these big headlines we've been tracking. Dan, appreciate the time.