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The short version

  • BlockFi was fined $100 million by the SEC for its interest-based accounts, BIA. The company agreed to pay the fine in November 2022.
  • As a result, BlockFi closed its BIA accounts to new users and old users will no longer be able to add new funds.
  • The move shows that the SEC is serious about making sure the crypto industry abides by securities law.

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Why did the SEC fine BlockFi $100 million?

Chances are that if you read Investor Junkie, you’re already quite familiar with the SEC. But you may not be familiar with BlockFi, so let’s start there.

BlockFi is a U.S.-based cryptocurrency platform specializing in crypto-backed loans. Founded in 2017 by Zac Prince and Flori Marquez, the platform’s novel lending services and interest-bearing accounts helped them amass piles of venture capital.

Although BlockFi offers the general functionality of a typical crypto marketplace — allowing you to buy, sell and trade to your heart’s content — its main draw was the BlockFi Interest Account, or BIA.

In short, the BIA was like a crypto savings account that let you earn interest on your crypto. Before they were banned, they supported a dozen cryptos in total, including BTC, ETH, LTC, and others.

Interest was paid out on a monthly basis and your rate was based on a tiered system, not unlike tax brackets. For the purpose of this report, however, all you really need to know is that users who funded a BIA were technically lending their money to BlockFi.

And that's the devilish little detail that caught regulators’ attention.

Why did the SEC fine BlockFi?

The short version: The BIA is obviously an interest-bearing product, and therefore should be registered as a security. By offering such a product, BlockFi should’ve registered themselves as an investment company.

But they didn’t.

As a result of these two choices, BlockFi continuously violated the Securities Act of 1933 and the Investment Company Act of 1940, respectively.

The Securities Act of 1933, also known as the “truth in securities” law, has two basic objectives, according to Investor.gov:

  1. To ensure that investors get the info and data they need to vet a purchase, and
  2. To prevent fraud

The law basically creates transparency around securities to protect investors from false advertising.

On that note, now’s a good time to mention that BlockFi wasn’t just in trouble for failing to register BIAs as securities. Rather, the SEC’s report gets more damning:

The order also finds that BlockFi made a false and misleading statement for more than two years on its website concerning the level of risk in its loan portfolio and lending activity. Without admitting or denying the SEC’s findings, BlockFi agreed to a cease-and-desist order prohibiting it from violating the registration and antifraud provisions of the Securities Act and the registration provisions of the Investment Company Act.

Massive oof.

I’m no lawyer, but the SEC seems to be implying that BlockFi were violating both provisions of the Securities Act of 1933.

It bears repeating that I’m no attorney, but still: yikes.

The Investors Act of 1940 essentially requires companies that sell securities to register as “investment companies” and follow a strict rulebook laid out by the SEC.

For example, investment companies have a board of directors with 75% independent members and maintain a certain amount of cash on hand should investors want to exit their holdings.

To summarize, according to the SEC, BlockFi allegedly:

  1. Didn’t register its interest account as a security
  2. Didn’t register themselves as an investment company, and
  3. Made a false and misleading statement for over two years regarding the risks associated with BIA accounts

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What was the “false and misleading statement”?

Here’s what the SEC had to say about the “false and misleading statement” in their full 14-page report on BlockFi.

“From March 2019 through August 2021, BlockFi misrepresented on its website that its institutional loans were ‘typically’ over-collateralized, when in fact, most institutional loans were not.”

OK, so BlockFi may have oversold its BIAs a little bit; and they should’ve registered them as securities. But clearly, the SEC wasn’t in a forgiving mood.

Why is BlockFi’s fine a bigger deal than it seems?

Judging by its massive size, the SEC’s fine of BlockFi was never intended to be a mere slap on the wrist in private, but rather a public flogging in the crypto town square.

And if you ask me, BlockFi kinda had it coming.

You see, this was no surprise attack. The SEC has already tried warning the U.S.-based crypto lenders that their products needed to be registered as securities. In 2021, the agency had a very public feud with Coinbase over their upcoming Coinbase Lend products because, you guessed it, Coinbase refused to register them.

“The SEC has told us it wants to sue us over Lend. We don’t know why,” wrote Paul Grewal, Coinbase’s chief legal officer, on Sept. 7, 2021.

After much grumbling, Coinbase eventually pulled Lend from the U.S. market. However, they still insist that it wasn’t because the SEC made a good case for suing, but because they made no case. Or, at least, none that Coinbase could even conceive of.

The SEC pointed a regulatory gun at Coinbase’s head, Coinbase said “you wouldn't dare” and, in response, the SEC shot BlockFi in the leg.

“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” wrote Gurbir S. Grewal, director of the SEC’s Division of Enforcement.

And that’s why BlockFi’s fine is such a big deal. It wasn’t just a quiet punishment to one company; it was a warning to the entire industry.

How will this effect BIAs, lending, and crypto prices as a whole?

In a related blog post, BlockFi made no mention of the fine, but frames the whole episode as a “landmark resolution” that will “provide clarity on pathway for crypto interest securities.”

“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,” wrote BlockFi founder Zac Prince.

I think BlockFi is giving themselves a little too much credit here. Yes, they're designing an SEC-compliant crypto loan product — but only because the SEC is forcing them to, lest they get sued further into oblivion.

Nevertheless, the concrete result of all this is that BlockFi is staying afloat, playing ball with the SEC and encouraging others to do the same.

As a result, BlockFi is closing the BIA to new investors. And existing BIA clients won’t be able to contribute additional funds to their existing accounts.

As for the lending industry as a whole, lenders big and small should now realize that the SEC means business. With their public caning of BlockFi, the SEC is telling everyone that there’s no excuse and no defense for violating laws that have upheld our financial system — and protected investors — for over 80 years.

How about crypto prices? Historically speaking, even the threat of increased regulatory oversight has sent prices tumbling. China’s announcement of a fresh round of crypto crackdowns in June of 2021 immediately wiped $400 billion off the market.

That may also be the case here, since crypto prices — which were already suppressed to begin with in Q1 2022 — fell even further after the SEC’s announcement made its rounds:

For more on the Great Crypto Crash of 2022, including why it happened and where it’s going, check out my other piece Bitcoin’s Black Friday: Everything You Need To Know About The 2022 Crypto Crash.

Is increased regulatory oversight good or bad?

When regulators step in, prices suffer, investors lose sleep and the overall crypto ecosphere becomes a little less decentralized, both literally and figuratively.

But does that mean increased regulation over crypto is always and entirely bad?

Although it may seem like the SEC is just crashing the crypto party, it’s important to remember that the agency exists to protect investors. From 2009 to 2014 alone, the SEC recovered untold billions in dozens of landmark cases against insider traders and other financial criminals. Without their direct intervention, bad guys would’ve certainly prolonged the Great Recession and robbed even more Americans of their livelihoods.

SEC oversight doesn’t just protect investors — it protects investor confidence. An SEC blessing may encourage conservative, traditional and institutional investors to trickle into the crypto space — and that would be good for all of us.

This is just one HODLer’s opinion, but while it may hurt values in the short term, I think increased regulatory oversight could actually be a good thing for investors in the long run.

The bottom line

If you’re a seasoned crypto investor, BlockFi’s public flogging may just feel like more bad news on top of an already dismal Q1.

But life is about framing, and I actually see the SEC’s actions as good news.

By fining BlockFi, the SEC isn’t saying that crypto lenders can’t operate in America; they’re just asking them to play by the same rules as everybody else.

There’s a sense of validation in that. It’s like our regulators are saying “if you’re gonna drink, we’d prefer if you do it in the house.”

For perspective, China and India wouldn’t even consider allowing crypto lending to happen inside their borders. They’d send Zac Prince and Flori Marquez straight to jail.

So I’m honestly grateful that, relative to their equivalents overseas, the SEC are acting like “cool parents” allowing for reasonable experimentation within the borders of safety.

I think keeping the crypto titans accountable to our existing financial laws is the right move. Because crypto’s future isn’t to break the rules that uphold society. It’s to beat the institutions at their own game.

BlockFi bankruptcy notice -On November 10, 2022, BlockFi announced that it had to suspend withdrawals from its platform due to the FTX liquidity crisis. As a result, consumers should not be using the BlockFi platform. As of November 28, 2022, BlockFi officially declared bankruptcy.

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Chris Butsch Freelance Contributor

Chris helps young people prosper - both mentally and financially. In addition to publishing personal finance advice for Investor Junkie (now Moneywise) and Money Under 30, Chris speaks on the topics of positive psychology and leadership through CAMPUSPEAK and sits on the advisory board of the Blockchain Chamber of Commerce.

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