The SEC has announced a settlement of charges against BlockFi Lending LLC (BlockFi) regarding its BlockFi Interest Account (BIA) product.
According to the SEC:
- investors lent crypto assets to BlockFi via BIAs
- BlockFi used investors’ crypto assets to make investments, including lending to institutional investors and
- investors received interest paid monthly on crypto assets.
The SEC order found that the BIAs were unregistered securities and accused BlockFi of failing to register its offering, violations of securities laws’ negligence-based anti-fraud provisions, and violation of the investment companies by operating as an unregistered investment company.
By settling this matter with the SEC, BlockFi has agreed to cease offering BIAs to new investors or accepting additional assets in BIAs from current investors, and not to violate these securities laws at all times. ‘to come up. BlockFi also agreed to pay $100 million in penalties and pursue registration of its BIA crypto lending product. $50 million of those penalties are fines to be paid to 32 states to settle similar charges, including Texas and Alabama.
BlockFi’s parent company, BlockFi Inc., has also publicly announced that it intends to register under securities law the offering and sale of a new investment product, BlockFi Yield. , with the SEC (or to take steps such that it is no longer necessary to register .)
This case provides insight into how the SEC assesses crypto lending platforms and how the agency will review crypto platforms engaging in similar activities. Notably, this case says nothing about any particular token or crypto asset; BlockFi is an exchange and does not have a native token.
The structure of the ZACs was at issue in this case. BIA investors received variable rate interest from the exchange as payment for lending their crypto assets to BlockFi. BlockFi has generated returns by deploying these crypto assets as loans, lending money to investors, and investing in stocks and futures. The SEC based its fraud allegations that BlockFi made false and misleading website statements on these collateral practices and the risks associated with BlockFi’s lending business.
Instead of just using the Howey test that permeated its actions against ICOs and other token offerings, the SEC concluded that BIAs were ratings that fell within the definition of securities using the Supreme Court’s analysis in Reves v. Ernst & Young and were an investment contract under the Howey test. Therefore, the LFI titles should have been, but were not, registered.
Commissioner Peirce’s dissent raises some interesting points about whether the securities regulatory framework is the appropriate framework to provide customer transparency on the terms and risks of crypto lending products, including requiring this platform to register securities and register as an investment company. She also points out that while the SEC wants crypto companies to come talk to them, it still hasn’t committed to working with those companies “to develop sensible, timely, and achievable regulatory pathways.”
This is the first such case brought against a crypto lending platform, although it follows the logic of the SEC’s much earlier case against Prosper Lending.
The SEC is investigating other similar crypto platforms, so we expect more similar cases to come. This decision has significant implications for other DeFi platforms.