BlockFi agrees to settle $100 million penalty to SEC and 32 States

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BlockFi, a U.S.-based firm that promotes a high-interest digital currency lending product, has agreed to settle with the Securities and Exchange Commission (SEC) and 32 U.S. states for a total of $100 million. The SEC announced that BlockFi had agreed to pay the penalties and “pursue registration” of its lending product. The settlement is one of the largest in the digital currency industry’s history to date.

More about the precedent-setting settlement

In its official statement, the SEC outlined the settlement with BlockFi in detail. We learned that:

• The SEC charged BlockFi with failing to register the offers and sales of its retail digital currency lending product.
• It also charged BlockFi with violating the registration provisions of the Investment Company Act of 1940.
• It found that BlockFi made a false and misleading statement on its website regarding the risk involved in its loan portfolio and lending activity.
• BlockFi agreed to pay an initial $50 million penalty and cease its unregistered offers. It subsequently agreed to pay a further $50 million to settle similar charges in 32 states.

“This is the first case of its kind with respect to crypto lending platforms. Today’s settlement makes it clear that crypto markets must comply with time-tested securities laws such as the Securities Act of 1933 and the Investment Company Act of 1940,” SEC Chairman Gary Gensler said.

Perhaps this settlement explains why BlockFi has been feverishly running promotions recently? How else would it come up with $100 million to pay the penalties?

Where is BlockFi going to get a hundred million dollars?

From people with money on BlockFi. That’s why they were doing all of the promotions. I told you to stay away. pic.twitter.com/kfgFt7iWUJ

— Bitfinex'ed 🔥🐧 Κασσάνδρα 🏺 (@Bitfinexed) February 12, 2022

What does this mean for other lending platforms?

What does this mean for other digital currency lending platforms like Coinbase LEND, Celsius, and others? To put it simply, it means that most of them are likely due a steep fine or two and that any revolutionary ideas that the old rules don’t apply to this industry have just been extinguished.

Indeed, the SEC’s Division of Enforcement director spelled this out in no uncertain terms. Gurbir S. Grewal said that “all crypto lending platforms offering securities like BlockFi’s BIAs should take immediate notice…and come into compliance with the federal securities laws.”

Should digital currency lending platform users be concerned?

BlockFi’s recent fine and several other ongoing investigations should be of significant concern to users of these platforms. Most of them operate outside of the law and with no regard for it. It’s possible that one big penalty like this could sink any or all of them. If such fines were levied in multiple jurisdictions such as the U.K., European Union, Australia, Singapore, or elsewhere simultaneously, it could bring the house of cards down quickly.

Adding to the risks associated with platforms like BlockFi is criminally-linked stablecoin giant Tether. If USDT is banned from several large countries following any of the multiple investigations into Tether’s potentially fraudulent activities, it’s almost certain that some of these lending platforms will face insolvency. Since Tether has already been caught outright lying by the New York Attorney General (NYAG) and banned from the state, this is a significant risk that would-be users of these platforms need to consider.

BlockFi may survive this $100 million settlement, but will it survive the next one with another country’s financial regulators? Will the other platforms survive such massive fines? Only time will tell. In any case, it’s getting riskier by the day to store or lend funds on these types of sites.

The digital currency industry must comply with existing laws and regulations

For a long time now, we at CoinGeek have been trying to hammer home the message that digital currencies and the blockchain industry as a whole must comply with existing laws and regulations. While many ‘crypto bros’ have scoffed at us, laughed at our warnings, and claimed that digital currencies operate outside of the realm of real-world laws, we’ve been echoing Bitcoin’s inventor Dr. Craig Wright and warning that this isn’t true.

As the BlockFi case and the ongoing investigations into Tether and other entities within the space show, the established laws still apply. Anyone who tells you otherwise is either uninformed or is attempting to paint an inaccurate picture of the situation for their own benefit.

Expect these enforcements to be the tip of the iceberg. There’s much more coming down the pipe, and by the time enforcement agencies like the SEC are finished, this industry will be unrecognizable. With the banning of anonymous transactions in several large jurisdictions and all of the ongoing investigations into Binance, Tether, Ripple, Gemini, Celsius, and others, it’s going to be an interesting (and risky) few years.

Follow CoinGeek’s Crypto Crime Cartel series, which delves into the stream of groups—a from BitMEX to Binance, Bitcoin.com, Blockstream, ShapeShift, Coinbase, Ripple, Ethereum, FTX and Tether—who have co-opted the digital asset revolution and turned the industry into a minefield for naïve (and even experienced) players in the market.