Digital currency platform BlockFi\u2019s dismissal of the brushback pitch thrown by New Jersey regulators could have major ramifications for company execs and those who helped promote unregistered securities. On Monday, the New Jersey Bureau of Securities issued a \u2018cease and desist\u2019 order against several BlockFi entities, preventing them from offering or selling unregistered securities to state residents. BlockFi offers digital currency interest-earning accounts known as BlockFi Interest Accounts (BIA), into which customers deposit select crypto assets that BlockFi loans to other customers.\u00a0 Effective July 22, BlockFi must cease offering any security, including any BIA, to New Jersey residents unless said security is registered with the Bureau. However, the Bureau\u2019s order doesn\u2019t preclude BlockFi from paying interest on existing BIAs or refunding the principal to New Jersey-based BIA investors. New Jersey\u2019s brushback was followed Wednesday by a similar message from the Alabama Securities Commission (ASC), which gave BlockFi 28 days in which to \u201cshow cause why they should not be directed to cease and desist from selling unregistered securities in Alabama.\u201d The ASC also took issue with BlockFi advertising itself as a \u2018US regulated entity\u2019 despite the fact that BIAs aren\u2019t registered with the ASC \u201cor any other securities regulator.\u201d After receiving New Jersey\u2019s C&D order\u2014the first of its kind targeting a digital asset lending platform \u2013 BlockFi CEO Zac Prince tweeted that it was discussing the matter with regulators in a bid to convince them that BIAs are \u201clawful and appropriate for crypto market participants.\u201d Prince added that BIAs are \u201cnot a security, and we therefore disagree with the action\u201d taken by the Bureau. Prince may view BlockFi products as lawful and appropriate, but some fine print in the company\u2019s T&C\u2019s might leave some customers asking, \u2018appropriate for whom?\u2019 Specifically, BlockFi grants itself the right \u201cto hold the cryptocurrency held in your account in BlockFi\u2019s name or in any other name, and to pledge, repledge, hypothecate, rehypothecate, sell, lend, or otherwise transfer, invest or use any amount \u2026 without retaining in BlockFi\u2019s possession and\/or control a like amount of cryptocurrency.\u201d In plainer terms, BlockFi has the right to leverage customer deposits to whatever degree it fancies, including creating further leverage by pledging assets as collateral to multiple individuals. Remember that BIAs offer interest rates well in excess of rates offered by bank accounts or short-term investment grade fixed-income securities, so BlockFi boasts a much higher tolerance for risk than more traditional investment platforms.\u00a0 The Bureau\u2019s C&D order notes that BlockFi investors have no idea how the platform allocates its investments, nor are customers informed as to the identity or creditworthiness of the borrowers to whom the platform lends material amounts of digital currency. The Bureau warned that the roughly $14.7 billion worth of digital currency that BlockFi holds in its BIAs are neither protected by the Securities Investor Protection Corporation (SIPC) nor insured by the Federal Deposit Insurance Corporation (FDIC). The Bureau also chided BlockFi for failing to disclose to investors that BIAs aren\u2019t currently registered with federal or state securities regulators. New sheriff\u2019s patience already wearing thin As if on cue, Wednesday brought a speech by Gary Gensler, the new chairman of the Securities and Exchange Commission (SEC), to the American Bar Association Derivatives and Futures Law Committee. Gensler\u2019s speech included a swipe at the credit default swap shenanigans that led to the 2008 global financial meltdown and the resulting need for \u201creducing risk and increasing transparency\u201d in securities markets. Gensler closed his remarks by discussing \u201cthe intersection of security-based swaps and financial technology, including with respect to crypto assets.\u201d Gensler noted the rise in the number of platforms offering \u201ccrypto tokens or other products that are priced off of the value of securities and operate like derivatives.\u201d Gensler clarified that it didn\u2019t matter \u201cwhether it\u2019s a stock token, a stable value token backed by securities, or any other virtual product that provides synthetic exposure to underlying securities. These platforms \u2014 whether in the decentralized or centralized finance space \u2014 are implicated by the securities laws and must work within our securities regime.\u201d Gensler added that the SEC had already \u201cbrought some cases involving retail offerings of security-based swaps; unfortunately, there may be more.\u201d Gensler warned that his agency would \u201ccontinue to use all of the tools in our enforcement toolkit to ensure that investors are protected in cases like these.\u201d If\/when the tide goes out While Gensler\u2019s speech was primarily directed at the types of stock tokens that the beleaguered Binance exchange formerly celebrated but recently disavowed after other regulators expressed concern, it\u2019s clear that the \u2018rules don\u2019t apply to us\u2019 stance adopted by so many digital currency platforms is now as rock solid a defense as humming Shaggy\u2019s It Wasn\u2019t Me. https:\/\/www.youtube.com\/watch?vT_x6QmuJdms Gensler\u2019s speech recalled that the pre-2008 market euphoria \u201callowed many banks to lower regulatory capital requirements to dangerously low levels.\u201d Similarly, the potentially excessive leverage employed by the likes of BlockFi could leave digital currency customers clutching at straws should a sudden market pullback cause a run on the undercapitalized bank. But unlike the 2008 crash, from which major financial institutions emerged largely unpunished, a digital currency reckoning may leave state and federal regulators far more interested in making a few examples. A crypto rogues\u2019 gallery could even feature third parties that saw fit to promote unregistered securities to U.S. residents. Like U.K. podcaster Peter McCormack, who has on multiple occasions tweeted his \u2018bullish\u2019 support for and \u2018trust\u2019 in BlockFi. McCormack, who is currently embroiled in a civil matter with Bitcoin white paper author Craig Wright, could find his barrister bills growing even larger should his BlockFi advocacy turn out to have been compensated promotional work. McCormack, who has attended some BTC love-ins on U.S. soil, may decide discretion is the better part of valor should other state or federal authorities decide to shine their regulatory spotlight on BlockFi. That said, we\u2019re sure Pete would prove a minor celebrity should he deign to appear at the next CoinGeek Conference at the Sheraton New York Times Square Hotel, October 5-7. Just be sure to clock all the emergency exits upon arrival, just in case. Follow\u00a0CoinGeek\u2019s Crypto Crime Cartel\u00a0series, which delves into the stream of groups \u2014 from\u00a0BitMEX\u00a0to\u00a0Binance,\u00a0Bitcoin.com,\u00a0Blockstream,\u00a0ShapeShift,\u00a0Coinbase,\u00a0Ripple\u00a0and\u00a0 Ethereum\u2014who have co-opted the digital asset revolution and turned the industry into a minefield for na\u00efve (and even experienced) players in the market.