By Jeff Rose
Back on February 14, 2022, crypto exchange extraordinaire BlockFi was slapped with an unprecedented SEC fine. How large are we talking here? A massive $100 million fine. If you didn’t know, this is the largest penalty ever recorded against crypto firms.
If you’re a BlockFi customer, like I am, I’m sure you have a lot of questions and concerns about how this settlement will impact you. What if you aren’t a BlockFi customer? You may be wondering how this is going to affect the crypto space going forward.
So, to help address these concerns, let me quickly explain what BlockFi did, as well as their response. I also want to go over how this is going to affect BlockFi customers and how you should proceed with BlockFi and crypto in general.
Now, before I can any further, let me give you all a little background here on BlockFi if you aren’t familiar with them.
Currently headquartered in Jersey City, NJ, BlockFi was founded in 2017. A major goal of BlockFi was to expand the reach of traditional banking services into communities that had not previously had access. And, it appeared to work as the company quickly gained a global presence.
BlockFi’s variety of products was what drew users to the platform. In addition to offering an exchange, BlockFi also offers loans at low-interest rates, a cryptocurrency rewards credit card and an interest-bearing account where you can earn up to 9.25% APY.
Of course, BlockFi isn’t the only company that offers high-yield crypto accounts. This is where customers deposit cryptocurrency for the promise of high APY while the company lends out that cryptocurrency for fees. Similar features are available from Celsius, Nexo, and Eco.
BlockFi, however, provides its users with a centralized mobile app, a unique credit card, and an array of other financial services. Moreover, a handy help center provides unique cryptocurrency use cases and teaches BlockFi’s users how to utilize the platform.
Another distinction? BlockFi is the first company to reach an agreement with the SEC that mandates it register its products as securities.
What Did BlockFi Do?
Alright, so let’s get into it. What exactly did BlockFi do to receive such a hefty penalty from the SEC?
Basically, BlockFi was charged with failing to register its crypto lending product for retail sale. And, as a result, this violated the Investment Company Act of 1940 registration requirements.
In particular, BlockFi marketed its interest accounts as a way to accumulate “up to 9.25 percent” interest on crypto deposited into the accounts. But in reality, the percentage varied from month to month. And, it was also determined by how much you had deposited in your account.
If you’re lost, here’s a breakdown of the process.
Customers deposited crypto assets into BIAs (BlockFi Interest Accounts) offered by BlockFi — usually Bitcoin and Ethereum. Customers, in turn, receive substantial interest in the form of crypto deposited back into their accounts every month.
Essentially, this system acted as a traditional savings account. But, you know, with crypto assets instead of dollars.
What made BlockFi’s returns seem so much higher than an average savings account? Well, it would lend crypto both to institutional traders and other collateralized borrowers. But, thanks to demand and limited access, BlockFi could charge higher rates of interest.
From the SEC’s point of view, this is a security. That means it needs either to be registered as a security or exempt from registration.
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