BlockFi to Pay Largest SEC Fine Ever for a Crypto Case

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The BlockFi website on a laptop computer. Gabby Jones/Bloomberg

Crypto asset owners could earn an 8% yield by lending their holdings to firms like BlockFi Lending. The trouble is, according to allegations in a Monday order from the Securities and Exchange Commission, BlockFi’s lending product was fraudulent and illegal.

BlockFi agreed to pay a $100 million fine—the largest penalty ever assessed in a crypto enforcement action—to settle charges by the SEC and 32 states alleging that the Jersey City, NJ-based firm failed to register its BlockFi Interest Account lending product as a security, and misrepresented the product’s risks.

In settling the case, BlockFi didn’t admit to the regulators’ allegations. It will halt sales of the product and introduce a new one that complies with securities laws.

“This is the first case of its kind with respect to crypto lending platforms,” SEC Chair Gary Gensler said in the agency’s announcement. Of the fine, $50 million will go to the SEC, and $50 million to the state regulators that are filing parallel actions. Other crypto enforcement cases have resulted in disgorgement of larger sums than BlockFi’s fine, but none have involved as large a penalty.

SEC officials said that the case might have gone even more harshly for BlockFi, but for the company’s cooperation. The agency urged other companies in the crypto lending space to come forward and ensure their products complied with securities laws.

(This is a developing story. Please check back soon for updates.)

According to the SEC’s order, BlockFi began offering its lending product in March 2019, accumulating as much as $14 billion in cypto assets under the program from nearly 600,000 retail investors around the world—some 400,000 of which were in the US

The BlockFi Interest Account paid an interest rate to retail investors who lent their crypt assets, which BlockFi lent onward to institutional investors. Regulation of the fast-evolving crypto world is in flux. But while Bitcoin and other cryptocurrencies have not been held to be securities, under current law, the SEC order cited case law to the effect that the BlockFi Interest Account was itself a form of investment contract or note.

Fraud allegations in the settled case said that BlockFi’s website told retail customers that lending their crypto assets to BlockFi was secure, because BlockFi’s loans to institutions were “typically” overcollateralized. According to the SEC order, however, most institutions refused to provide BlockFi with the collateral it wanted for the loans—and some 70% of BlockFi’s institutional loans weren’t adequately collateralized.

“Crypto 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,” said SEC enforcement director Gurbir Grewal, in Monday’s announcement.

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