Voyager Digital is the latest crypto exchange under siege for its interest-bearing crypto accounts, with regulators from seven states either demanding information or issuing cease-and-desist orders.
New Jersey-based BlockFi paid $100 million on Feb. 14 to settle state and federal lawsuits calling a similar high-yield account an illegally unregistered securities offering. The accounts typically offer far higher interest rates — 9.5% in BlockFi’s case — than traditional banks’ savings products.
The interest-bearing accounts from centralized exchanges mirror one of the most popular products in decentralized finance (DeFi): Lending borrowing platforms. These offer crypto owners who lock tokens into a lending account high returns on the digital assets loaned out for crypto collateral.
Read more: PYMNTS DeFi Series: What is Yield Farming and Liquidity Mining?
One big difference is that decentralized platforms are far harder to target for enforcement.
States Move First
There’s another big difference, however. In this case, the state regulators are running ahead of the Securities and Exchange Commission (SEC), bringing complaints against Voyager Digital.
Regulators in Indiana, Kentucky, New Jersey and Oklahoma have issued cease-and-desist orders, while Alabama, Texas, Vermont and Washington have sent show-cause orders asking for information about the Voyager Earn Accounts, the company said in a Wednesday (March 30) press release. Where required, the company has stopped accepting new accounts or transfers into the accounts.
Echoing the analogy of choice of SEC Commissioner Gary Gensler, New Jersey’s acting attorney general Matthew Platkin said that yesterday’s enforcement action “says loud and clear that the cryptocurrency securities market is not the Wild West, and investor-protection laws absolutely apply.”
What’s the Problem?
Platkin said investors in the Voyager Earn Accounts “may not receive any information about the specific investment strategies used by the issuer to generate investment returns, may not be advised about the creditworthiness of counterparties with whom the issuer does business, and may not be apprised of the use of leverage, or other risky investment strategies employed by the issuer to generate a return.”
Promising to “hold accountable all those who threaten the integrity of our financial industry and place investors at risk,” Platkin said the state’s Bureau of Securities will “ensure everyone is following the rules, especially when it comes to the ever-evolving cryptocurrency market.”
Voyager, for its part, says that it is “firmly convinced” that its Earn Program and Voyager Earn Accounts aren’t securities and that it will continue to defend its position.
“Voyager supports appropriate regulation and will do its best to demonstrate to these regulators that Voyager has complied with the law,” it said in a statement.
Move Fast, Get Broken
From the SEC’s side, the enforcement actions have followed a pattern of picking a juicy target, hitting it and a few others with fines for what it says are securities violations, and then watching the rest fall into line — despite a distinct lack of clarity about what the rules of crypto investing are.
That clarity is something the industry has been calling for nearly constantly for the last five years.
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So far, only one company, Ripple, has been willing to object strenuously — or risk — enough to take the SEC to court.
More here: Ripple Lawyer Confident SEC Case Will Wrap in April
In this latest round of enforcement actions, BlockFi was the first targeted, with reports that the agency was investigating BlockFi for leaking in November. Then, in January, news broke that the SEC was investigating three other crypto firms over the interest accounts — Voyager Digital, Celsius Network and Gemini Trust.
Related reading: Crypto Lenders Gemini, Voyager and Celsius Network Under SEC Microscope
Interestingly, the SEC warned Coinbase off launching a similar product, Coinbase Earn, in September, threatening to sue if it launched. That drew outrage from Coinbase, which is known for working closely with regulators, mostly because the agency wouldn’t say why it considered the program a securities offering.
Other news: Coinbase Kills Lend Product Amid SEC Ire
However, that was well before the BlockFi investigation and its $100 million settlement, which may have calmed Coinbase’s ire considerably.
Also read: SEC’s New Top Cop: No Free Pass For Unregistered Crypto Lenders
And it’s worth noting that Coinbase did notify the SEC of its plans in advance, which suggests that’s why the firm got off easy.
That’s particularly in light of comments by the SEC’s new enforcement director Gurbir Grewal, on Feb. 28.
Speaking about the interest-bearing accounts and the crypto lending products that support them, he said the agency’s “message is that we’ll view their conduct more favorably if they come in — such as what the remedies will look like, including penalties, and finding a path to complying with the securities laws. That’s the benefit entities get from self-reporting violations and working with us.”
That’s roughly what the agency has said about every other area of cryptocurrency it has focused on, starting with initial coin offerings, or ICOs, in 2018.
However, with the newly emboldened state regulators starting to work together with the SEC’s involvement, the Voyager Digital action could signal the start of a whole new enforcement battle.
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