BlockFi, a company that paid high interest rates to cryptocurrency investors for lending their digital assets, agreed to pay $100 million in fines to the Securities and Exchange Commission and 32 states for violating securities laws and misrepresents the risk of his business. .
The case marks the federal market regulator’s first against a crypto lending platform, SEC Chairman Gary Gensler said. in a report.
The agency’s share of $50 million in the fine — the other $50 million will be split between the states — is the largest yet against a crypto company.
BlockFi neither admitted nor denied wrongdoing, but agreed to stop selling its loan product and try to bring its business into compliance with SEC rules within 60 days.
“Today’s regulations make it clear that crypto markets must comply with proven securities laws, such as the Securities Act of 1933 and the Investment Companies Act of 1940,” Gensler said.
BlockFi CEO Zac Prince said the settlement represents a victory for the company, giving it a clear path forward.
“From the day we launched BlockFi, we always knew that strong engagement with regulators would be essential for the adoption of cryptocurrency-powered financial services,” he said in a statement.
“Today’s step is another example of our pioneering efforts to ensure regulatory clarity for the entire industry and our customers, just as we did for our first product – loan crypt.”
For the past three years, the Jersey City-based company has offered clients up to 9% interest on their crypto deposits.
The company says it can afford to pay such a premium, when the average interest rate on a savings account at a bank is 0.06%, partly because institutional investors are paying rates still higher to borrow crypto to execute trades.
As of March 31, the company held $14.7 billion in deposits under the loan program, according to the SEC.
The agency said BlockFi promoted interest-bearing accounts as investments and therefore should have registered them with the SEC as securities, which it did not.
And the SEC said BlockFi misleads customers about the security of the loans the company makes with their digital assets by claiming that institutional borrowers typically post collateral worth more than their loans.
In fact, most haven’t, the SEC said.
BlockFi said existing customers can keep their accounts and continue to earn interest on their deposits, but will not be able to add new crypto to them.
The company is looking to launch a new product for crypto investors to earn interest on their assets, called BlockFi Yield, which will be registered with the SEC.
SEC Commissioner Hester Peirce, who has advocated a more passive approach to regulating the crypto industry, said in a statement that she disagrees with the agency’s crackdown.
“While penalties of this size are intended to deter misconduct, here there is no allegation that BlockFi failed to pay its customers the money owed to them or return the crypto. which was loaned to him,” she said.
“BlockFi’s misrepresentations regarding overcollateralization are serious, but the combined $100 million penalty nonetheless appears disproportionate.”
The company had come under intense scrutiny from state regulators.
In July, the New Jersey Attorney General ordered BlockFi to stop offering paid accounts to residents of its home state.
Regulators in Alabama, Kentucky, Texas and Vermont also accused the company of violating state securities laws.
The sanction against BlockFi comes as the crypto industry faces growing calls for stricter and more orderly oversight.
In Washington, as federal regulators try to sort through competing jurisdictional claims and murky legal authority over the sector, Gensler pledged to put the SEC at the forefront of an effort to impose new barriers of security.
He described the $1.9 trillion industry as a “Wild West” plagued by abuse.
And in the absence of new regulations, Gensler moved on to policing through enforcement action.
When Coinbase, the largest U.S. crypto-trading platform, announced it would launch its own lending program last year, the SEC threatened to sue.
The company shelved the plan in September.