BlockFi’s $100 Million Settlement With SEC Raises Internal Discussion 

The Securities and Exchange Commission (SEC) charged BlockFi with failing to register the offers and sales of its retail crypto lending product on Monday (Feb. 14).

To settle the SEC’s charges, BlockFi agreed to pay $100 million in penalties, cease its unregistered offers and bring the business within the provisions of the Investment Company Act in 60 days. However, this decision hasn’t been applauded by all commissioners at the SEC. 

“This is the first case of its kind with respect to crypto lending platforms,” SEC Chair Gary Gensler said. “Today’s settlement makes clear that crypto markets must comply with time-tested securities laws.”

What makes this case the first of its kind is that the SEC “extended” its enforcement powers to crypto yield products. BlockFi offered Interest Accounts to investors with up to 9.25% return for their crypto deposits. This settlement sends a message to other crypto lending platforms that their products may be considered securities and they may need to register their offerings and comply with disclosure requirements.  

There is a growing debate about what digital assets are securities, and therefore should be registered with the SEC, and which ones are commodities and are exempted.

Last week, on a Senate hearing, Rostin Behnam, chairman of the Commodity Futures Trading Commission (CFTC), declared that his agency is ready to take on more oversight of digital assets if congress decides to grant additional responsibilities. For the time being, there seems to be agreement only on bitcoin, as it is considered a commodity, but the SEC hasn’t recognized other cryptocurrencies as commodities.

The same goes with other financial products linked to crypto assets where the legal situation is unclear: Future ETF bitcoins fall under CFTC remit, but spot bitcoin ETF may fall under the SEC. 

Read more: At Senate Hearing, CFTC Chair Behnam Steps Up Battle With SEC for Crypto Oversight 

With this decision, the SEC wants to bring under its remit some crypto yield products. But the first criticism came from within the SEC. 

Commissioner Hester M. Peirce issued a dissenting opinion where she declared that “this is not the best way to protect crypto lending customers.”

“Applying the securities regulatory framework has consequences, some of which may be unfortunate.  Rather than forcing transparency around retail crypto lending products, today’s settlement may stop them from being offered to retail customers in the United States,” said Peirce. 

The first question Peirce raised is about the civil penalties. In her view, penalties of this size are intended to deter bad conduct — but in this case, BlockFi didn’t fail to pay its customers the money due, nor did it fail to return the crypto lent to it. “BlockFi’s misrepresentations about over-collateralization are serious, but the combined $100 million penalty nevertheless seems disproportionate.”

Then, she also questioned the timeframe given to BlockFi to comply with the securities law and with the Investment Company Act to apply for an exclusion from registration. The SEC gave BlockFi 60 days for a process that could take a few months, casting some doubts about the ability of the company to do it. 

“We often tell companies wanting to offer products that could implicate the securities laws to ‘come in and talk to us,’” said Peirce. “To make that invitation meaningful, however, we need to commit to working with these companies to craft sensible, timely, and achievable regulatory paths.”

This is not the first time that Peirce disagreed with the rest of the commissioners on the path taken by the SEC in crypto assets. But this time, the SEC´s decision may provide less clarity than expected. While the decision to charge BlockFi may be legally sound, the SEC may just have expanded the products that need to be registered without previous notice — and this lack of clarity may raise more questions than answers among companies, investors and consumers. 

Read more: SEC Commissioner Peirce Says Proposed Rule on Exchanges Could Hurt Digital Currency 

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