BlockFi has risen into the spotlight after it released its new credit card that gives rewards back in crypto. However, it is their other accounts that have drawn greater attention from the SEC and have taken a direct hit to BlockFi’s checkbook. On February 14th, 2022, the Securities and Exchange Commission (SEC) handed down one of the largest penalties ever imposed in the crypto space. The charge, failing to register the offers and sales of its retail crypto lending product. The settlement, $50 million to the SEC and $50 million to 32 states to settle similar charges and an agreement to stop offering BlockFi Interest Accounts. Is failing to register their BlockFi Interest Accounts really that big of a deal and what does this mean for cryptocurrencies in general?
The BlockFi Interest Accounts enabled their users to deposit funds into a BlockFi cryptocurrency account, which is based in the US, and earns up to 9.25% per year. In the eyes of the SEC these accounts are viewed as a debt security since the users are lending money to BlockFi and then promised a regular return of interest payments. What is a debt security? A debt security is a debt instrument that can be bought or sold between two parties and has basic terms defined, such as the notional amount (amount borrowed), interest rate, and maturity and renewal date. What is a debt instrument? A debt instrument is a tool an entity can utilize to raise capital.
Looking at this objectively one can start getting quite worried that this spells out disaster for the crypto-based lending markets in the US. Not only does it threaten heavy restrictions on cryptocurrencies, but it also impacts who is able to file with the SEC to get started in the first place. As one can imagine filing with the SEC is not free and in fact is quite costly and can take a while to process. Fees are calculated by multiplying the aggregate offering amount by 0.0000927 or $92.70 per $1,000,000 or around $300,000 for BlockFi at this time. Other companies may not be able to meet this requirement, thereby filtering out the available crypto-based lending companies and driving down competition for the few who are able to afford the price to play with the SEC. This is scary because it is through competition that we get great products that more greatly impact the consumer in a positive way.
Regulators are only willing to accept cryptocurrencies and crypto-based products only if they conform to the outdated existing regulatory regulations. “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,” Gary Gensler SEC chairman.
BlockFi has since announced that it does plan on filing with the SEC and reopen their BlockFi interest accounts in time. What do you think about this settlement? Do you think it is fair or do you think these policies are outdated and not suited for such complicated securities such are cryptocurrency?
References:
Chen, J. (2021, May 19). Debt instrument. Investopedia. Retrieved March 2, 2022, from https://www.investopedia.com/terms/d/debtinstrument.asp
Confidential S1 filing. BlockFi. (n.d.). Retrieved March 2, 2022, from https://blockfi.com/confidential-s1-filing
Fernando, J. (2021, May 19). Debt security definition. Investopedia. Retrieved March 2, 2022, from https://www.investopedia.com/terms/d/debtsecurity.asp
Other. SEC Emblem. (2015, October 1). Retrieved March 2, 2022, from https://www.sec.gov/ofm/Article/feeamt.html#:~:text=Filing%20Fee%20Rate%20The%20current%20fee%20rate,for%2010%2F1%2F2021%20to%209%2F30%2F2022%20is%3A%20%2492.70%20per%20%241%2C000%2C000
Statement. SEC Emblem. (2022, February 14). Retrieved March 2, 2022, from https://www.sec.gov/news/statement/peirce-blockfi-20220214
What does Blockfi’s massive $100m settlement with SEC mean ... (n.d.). Retrieved March 2, 2022, from https://www.cryptovantage.com/news/what-does-blockfis-massive-100m-settlement-with-sec-mean-for-crypto/
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