BlockFi, a company that paid cryptocurrency investors high interest rates for lending out their digital assets, agreed to pay $100 million in fines to the Securities and Exchange Commission and 32 states over charges it violated securities laws and made false statements about the riskiness of its activity.
“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,” Gensler said.
BlockFi chief executive Zac Prince said the settlement represented a victory for the company, giving it a clear path forward.
“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,” he 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.”
For the past three years, the Jersey City-based company has offered customers as much as 9 percent interest on their crypto deposits. The company says it can afford to pay such a premium — while the average interest rate on a savings account at a bank sits at 0.06 percent — in part because institutional investors pay even higher rates to borrow the crypto to execute trades.
By March 31, the company held $14.7 billion in deposits through the lending program, according to the SEC. The agency said BlockFi promoted the interest-bearing accounts as investments and therefore should have registered them with the SEC as securities, which it did not do.
And the SEC said BlockFi misled customers about the safety of the loans the company was making with their digital assets by claiming institutional borrowers typically posted collateral worth more than their loans. In fact, most did not, the SEC said.
BlockFi said existing customers can maintain their accounts and continue to earn interest on their deposits but will not be able to add new crypto to them. The company is seeking to launch a new product allowing crypto investors to earn interest on their assets, called BlockFi Yield, that will be registered with the SEC.
SEC Commissioner Hester Peirce, who has advocated a more hands-off approach to regulating the crypto industry, said in a statement she disagreed with the agency’s crackdown. “While penalties this size are intended to deter bad conduct, here there is no allegation that BlockFi failed to pay its customers the money due them or failed to return the crypto lent to it,” she said. “BlockFi’s misrepresentations about over-collateralization are serious, but the combined $100 million penalty nevertheless seems disproportionate.”
The company had faced mounting scrutiny from state regulators. New Jersey’s attorney general in July ordered BlockFi to stop offering interest-bearing accounts to residents of its home state. Regulators in Alabama, Kentucky, Texas and Vermont also accused the company of violating state securities laws.
The penalty against BlockFi comes as the crypto industry faces mounting calls for tougher and more-orderly oversight. In Washington, as federal regulators try to sort through competing jurisdictional claims and murky legal authority over the sector, Gensler has pledged to put the SEC at the vanguard of an effort to impose new guardrails.
He has described the $1.9 trillion industry as a “Wild West” rife with abuses. And in the absence of new regulations, Gensler has moved to police it through enforcement actions. When Coinbase, the largest U.S. crypto trading platform, said it would launch its own lending program last year, the SEC threatened to sue. The company shelved the plan in September.
An earlier version of this article misspelled Peirce's name as Pierce. The article has been corrected.