WASHINGTON: A subsidiary of crypto company BlockFi Inc has agreed to pay $100 million to the US Securities and Exchange Commission (SEC) and 32 states to settle charges in connection with a retail crypto lending product the New Jersey company offered to nearly 600,000 investors, regulators said on Monday.
The penalty includes $50 million to the state regulators and $50 million to the SEC, the largest ever fine the federal securities watchdog has levied on an issuer of crypto asset securities, the SEC said. The North American Securities Administrators Association, which led a multi-state working group on the investigation, said in a separate statement that more jurisdictions are expected to follow.
BlockFi Lending LLC, the subsidiary, broke the rules by offering an interest-bearing lending product without registering it with regulators. The company and its affiliates held about $10.4 billion in assets from investors - nearly 400,000 in the United States - as of Dec. 8, the SEC said.
BlockFi, which neither admitted nor denied the SEC’s findings, said in a statement the resolution is an example of the firm’s “pioneering efforts in securing regulatory clarity for the broader industry and our clients.”
As part of the terms of the deal, BlockFi plans to offer an alternative product expected to be the first crypto interest-bearing security registered with the SEC, the company said. The charges are lower than they might have been due to BlockFi’s willingness to cooperate, the SEC said.
The charges come as US regulators, worried about investor protections and systemic risks, are cracking down on the booming crypto industry by forcing companies in the space to comply with existing US securities laws.
Adhering to US laws governing company’s registration and disclosure is “critical to providing investors with the information and transparency they need to make well-informed investment decisions in the crypto asset space,” said Gurbir Grewal, director of the SEC’s enforcement division.
The SEC has heightened its scrutiny of crypto exchanges and lenders under Chair Gary Gensler, who has said wants to bring the digital asset sector within the existing regulatory framework. Crypto asset companies, meanwhile, say the existing rules are inappropriate.
From March 2019 to present, the firm offered and sold so-called BlockFi Interest Accounts, or BIAs, that allowed investors to lend crypto assets to BlockFi in exchange for a promise to provide a variable monthly interest payment, the SEC said.
The offering was a violation of securities laws because the company failed to register it with the SEC. BlockFi also broke rules by failing to register as an investment firm, the SEC said.
The firm also understated the risks associated with its lending activities by making false or misleading statements for more than two years that they were typically over-collaterized when the majority were not, the SEC said.
BlockFi had also been struggling with scrutiny from state regulators. New Jersey and several other states last year ordered BlockFi stop selling the interesting-earning crypto accounts.
BlockFi will no longer offer the product to new US investors. It will continue to service existing accounts but will not allow customers to add to those investments. It will comply with laws governing investment companies and will register a new product called a BlockFi Yield.
Crypto lending products in particular have become an SEC target. In September, Coinbase Global Inc said the agency was threatening to sue if it went ahead with plans to offer a similar product.