BlockFi to pay $100M SEC penalty over crypto lending product

BlockFi Lending LLC has reached a $100 million settlement with the Securities and Exchange Commission and 32 states after being charged with failing to register offers and sales of its retail crypto lending product and violating registration provisions of the Investment Company Act of 1940. 

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According to the SEC, the company, which is backed by investor Peter Thiel, began offering and selling BlockFi Interest Accounts (BIAs) to the public in March 2019, in which investors lend crypto assets to the company in exchange for its promise to provide a variable monthly interest payment. 

The agency states that BlockFi operated for more than 18 months as an unregistered investment company and made "material false and misleading statements" on its website that its loans were over-collateralized. BlockFi advertises that its customers can earn an annual percentage yield of up to 9.25% with a BIA. 

As of Dec. 8, 2021, BlockFi and its affiliates held approximately $10.4 billion in assets from over 572,000 BIA investors, including over 391,000 in the United States. 

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Without admitting or denying wrongdoing or liability, BlockFi has agreed to pay a $50 million penalty to the SEC and a $50 million penalty to 32 states, cease unregistered offers and sales of BIAs and bring its business within compliance of the Investment Company Act of 1940 within 60 days. In addition, the company intends to register BlockFi Yield, a new crypto interest-bearing security, with the SEC. 

"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," BlockFi founder and CEO Zac Prince said in a statement. "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." 

Existing BlockFi Interest Account clients in the U.S. will maintain their current interest-bearing accounts but will be prohibited from adding new assets or opening new BIAs. Following completion of the SEC registration process, the BIA clients will be transitioned to BlockFi Yield. The resolution does not impact BIAs of BlockFi clients outside the United States. 

BlockFi will continue to offer the rest of its broad suite of retail and institutional products to customers worldwide, including BlockFi Trading, the BlockFi Rewards Credit Card, BlockFi Personalized Yield and BlockFi Loans. 

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The settlement is the first 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. It further demonstrates the Commission’s willingness to work with crypto platforms to determine how they can come into compliance with those laws," SEC chairman Gary Gensler said in a statement Monday. "I’d like to thank and commend our remarkable SEC staff and state regulators for their efforts and collaboration on this settlement."

Gurbir Grewal, the director of the SEC's enforcement division, warned crypto lending platforms who offer securities similar to BlockFi's BIAs to take "immediate notice" of Monday's resolution and come into compliance with federal securities laws. 

"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," he added. 

At the time of publication, Bitcoin, the world's largest cryptocurrency, was trading around $42,000 per coin.