On February 14, 2022, the SEC announced charges against BlockFi Lending LLC – a New Jersey-based cryptocurrency lending platform – for failing to register its crypto lending product and violating the Investment Company Act of 1940. BlockFi agreed to a settlement in which it will pay a $50 million penalty, cease unregistered offers and sales of its lending product, and attempt to bring its business in compliance with the Investment Company Act within sixty (60) days. Additionally, BlockFi agreed to pay $50 million in fines to 32 states to settle similar charges.
BlockFi offered and sold to investors BlockFi Interest Accounts (“BIAs”), through which investors lent crypto assets to BlockFi and, in exchange, BlockFi promised variable monthly interest payments paid in cryptocurrency. The SEC’s Order sets forth the Commission’s findings. First, it concluded that the BIAs were securities because they were notes under Reeves v. Ernst & Young, 494 U.S. 56 (1990), and because they were sold as investment contracts under SEC v. W.J. Howey Co., 328 U.S. 293 (1946). Second, the SEC found that BlockFi was engaged in an illegally unregistered securities offering. Third, it found that BlockFi violated Sections 17(a)(2) and 17(a)(3) of the Securities Act by making materially false and misleading statements concerning its collateral practices and the risks associated with its lending activity. Finally, the SEC determined that BlockFi was operating as an unregistered investment company.
SEC Chair Gary Gensler noted that “[t]his is the first case of its kind with respect to crypto lending platforms.” Gensler emphasized that “crypto markets must comply with time-tested securities laws,” and expressed that the SEC is willing “to work with crypto platforms to determine how they can come into compliance with those laws.” Gurbir S. Grewal, Director of SEC’s Division of Enforcement, cautioned that “[c]rypto lending platforms offering securities like BlockFi’s BIAs should take immediate notice of today’s resolution and come into compliance with the federal securities laws.”
The SEC’s Office of Investor Education and Advocacy and the Division of Enforcement’s Retail Strategy Task Force issued an Investor Bulletin on February 14, 2022, “to educate investors about risks within accounts that pay interest on crypto asset deposits.”