BlockFi to Pay $100 Million in SEC Settlement

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  • BlockFi will pay $50 million to the SEC and a further $50 million to settle fines in various U.S. states.
  • U.S. customers will not be able to add new funds to their accounts, and BlockFi can't open new accounts in the U.S. Customers will continue to earn interest.
  • BlockFi will launch a new SEC-approved product called BlockFi Yield.

The settlement could impact other lend-earn products, especially smaller players.

Popular crypto lending platform BlockFi has reached a $100 million settlement with the Securities and Exchange Commission (SEC) and ceased sales of its lending product in the U.S. The SEC says BlockFi's interest-earning crypto accounts are securities. As such, it argues BlockFi should have registered with the SEC before selling them.

BlockFi has not admitted any wrongdoing, but will immediately stop selling its interest-earning accounts in the U.S. The BlockFi Interest Accounts appealed to investors, as they paid up to 9.25% APY on crypto deposits. However, the product also attracted the ire of both the SEC and authorities in a number of states. Of the $100 million penalty, $50 million will go to settle fines in 32 states, and the other $50 million will go to the SEC.

What this means for BlockFi users

If you're a BlockFi customer, the important thing to know is that your assets are safe and will continue to earn interest. The big change is that existing customers won't be able to put more money onto the platform, and BlockFi won't be able to accept new U.S. customers -- for now, at least.

Here's how that will work:

  • U.S. users won't be able to add new assets to their accounts. However, BlockFi will continue to pay interest on existing assets.
  • BlockFi plans to create a new, SEC-approved product called BlockFi Yield. Once this has been done, it says it will migrate its U.S. customers to the new yield accounts.
  • Non-U.S. customers will not be affected.

What is a security?

The definition of a security is at the crux of the SEC's issues with many cryptocurrency players. Products that are classified as securities have to register with the SEC, and there are strict rules around how they can be traded and what information they need to report. In the case of BlockFi, the SEC says it's a security because investors lent crypto assets to the platform in exchange for a monthly interest payment.

BlockFi is not the only crypto product in the SEC's crosshairs. SEC Chair Gary Gensler has repeatedly stated that several crypto products fit the definition of an investment contract, which makes them securities. By this logic, Gensler says a product is a security when "a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party."

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Right now, most cryptocurrencies are classed as commodities and come under the purview of the Commodity Futures Trading Commission (CFTC). This means they don't have to follow the same rules, and crypto exchanges do not have to register with the SEC to trade them.

What this means for crypto lending

After the SEC blocked Coinbase's lend-earn products last year, there was a strong chance BlockFi would be forced to withdraw its offering. The settlement is likely to have implications for other crypto lending platforms as well. They may now need to withdraw their U.S. products or register with the SEC, as BlockFi plans to do.

Max Dilendorf, a digital asset attorney, told TechCrunch that some lending platforms could be wiped out by these requirements. He explained that the costs of meeting additional regulatory burdens could be crippling for smaller players.

Larger players could also be impacted. For example, popular cryptocurrency exchange Gemini, which prides itself on regulatory compliance, pays up to 8.05% APY with its Gemini Earn product. Gemini users essentially lend their crypto to institutional borrowers to earn above-average rates of return on their assets.

If you already have assets on a lend-earn platform, the good news is that the BlockFi settlement did not impact existing customer deposits. But that may not be the case if the platform you use is wiped out completely. Unlike U.S. dollars held by banks, cryptocurrency assets are not covered by FDIC insurance in the event of bankruptcy. Now may be a good time to understand what protections are in place and how the platform you use generates those high returns.

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