Between July 20 and July 22, 2021, securities regulators in the states of New Jersey, Texas and Alabama targeted BlockFi – a cryptocurrency-based platform that raised $ 14.7 billion from investors – linked to the company’s interest-bearing crypto accounts. This regulatory review, conducted by a bipartisan group of state securities regulators, may prove important given that state and federal law has failed to enact comprehensive legislation regarding digital assets.
BlockFi is a financial services company that provides “Market credit services with limited access to [banking] products, such as a savings account. BlockFi Allows Investors “To Use Cryptocurrency To Earn Interest Up To 7.5% [Annual Percentage Yield], borrow money, and buy or sell crypto “with no“ hidden fees ”or“ minimum balance. ”The company generates income by allowing investors to deposit cryptocurrency into interest-bearing accounts, known as bank accounts. BlockFi Interest (BIA). BlockFi then uses BIAs to fund its lending operations. These operations include offering cryptocurrency-backed trading accounts and loans. BlockFi also uses BIA deposits to transact on account own.
While the business model may appear to resemble that of a traditional bank or brokerage firm, there is one key difference: BlockFi’s BIAs are not registered with any federal securities regulator. or state. The accounts are also not protected or insured by the Securities Investor Protection Corporation or the Federal Deposit Insurance Corporation. As a result, the company’s operations leave investors vulnerable to increased risk, which has likely caught the attention of regulators in New Jersey (BlockFi’s home state).
New Jersey Bureau of Securities Cease and Desist Order
On July 20, 2021, the New Jersey Bureau of Securities (part of the New Jersey attorney general’s office) order BlockFi will stop selling BIAs because BIAs are unregistered securities. Office Press release noted that the order was issued “amid growing concerns over the proliferation of … financial platforms [seeking] to reinvent traditional financial systems. However, BlockFi disputes that its BIAs are unregistered securities, qualifying them as “lawful and appropriate for [the] crypto market.
The order also alleged that BlockFi did not disclose its unregistered status to investors, despite claiming to be a “US-regulated” entity on its website. Acting Attorney General Andrew Bruck said, “Our rules are simple, if you’re selling securities in New Jersey, you have to comply with New Jersey securities laws…. No one gets a free pass just because they operate in the rapidly evolving cryptocurrency market.
The office order, however, fails to order BlockFi to return the principal of the existing account holder. The order also does not prevent BlockFi from paying interest on existing accounts.
Alabama Securities Commission issues show cause order
Also on July 20, 2021, the Alabama Securities Commission issued a order provide BlockFi with 28 days to justify why the company should “not be asked to cease and desist from selling unregistered securities in Alabama.” Pursuant to the New Jersey action, the show cause order also asserts that BlockFi inappropriately advertises that it is a “regulated entity in the United States” although it is not registered with the Alabama Securities Commission.
Texas files own show cause order
Two days later, on July 22, 2021, the Lone Star State State Securities Board filed its own case. order against BlockFi, giving the company the opportunity to respond to the same allegations and present evidence at an administrative hearing scheduled for October 13. Specifically, the ordinance asserts that BlockFi is not licensed to sell securities in Texas and subjects Texas investors to undisclosed risks associated with buying and selling securities.
BlockFi CEO Comments
In a series of tweets, CEO Zac Prince admitted that the company received the order in New Jersey, but pledged to continue supporting BlockFi’s existing customers in the state. BlockFi then doubled its position in response to the Texas and Alabama actions, saying, “Our position has not changed – the Blockfi Interest Account is not a security.”
A sign of future application
This year, according to Google Trends, search terms for “bitcoin,” the largest cryptocurrency by market cap, have fallen from a value of just six in December 2020 to 91 in May 2021. Simultaneously, the price of bitcoin increased by 209.7%. With the rise of crypto, however, came a associated rise in crypto-related scams, which the Federal Trade Commission said scammed investors $ 80 million – a record amount. As a result, these enforcement actions against BlockFi will likely be the first of many state-led enforcement actions targeting crypto-based investment products.
Implications and conclusion
BlockFi is the last digital asset company to face regulatory scrutiny. It’s also an example of the problems that arise when states and the federal government fail to comprehensively regulate a new product. While bitcoin and ethereum are considered commodities based on comments from the SEC and CFTC, these actions by a bipartisan group of states could set a precedent for how states deal with commodities. crypto-backed products. Thus, in the absence of comprehensive regulation, companies offering products related to digital assets are at increased risk of enforcement action disrupting their product offerings, which could ultimately harm investors.