Cryptocurrency deposit-taker and lender BlockFi made materially false and misleading statements on its website about the risks facing smaller clients, the US securities regulator said today.
According to the Securities and Exchange Commission (SEC), which today fined BlockFi $50m for failing to register the offers and sales of its retail crypto lending product, the firm made loans of cryptocurrency to institutional investors without ensuring adequate backing, while at the same time misrepresenting the risks to retail investors.
“From the time of BlockFi’s launch of its interest account on March 4, 2019 and continuing to August 31, 2021, BlockFi made a statement in multiple website posts that its institutional loans were ‘typically’ over-collateralized, when in fact, most institutional loans were not,” the SEC said.
In fact, said the SEC, BlockFi backed out of its promise to ensure adequate collateral for loans because large institutional investors were frequently not willing to post large amounts of collateral to secure their loans.
Less than a quarter of BlockFi’s loans of cryptocurrency to institutions had full collateral backing, said the SEC, and the proportion has been falling.
“Approximately 24% of institutional crypto asset loans made in 2019 were over-collateralized; in 2020 approximately 16% were over-collateralized; and in 2021 (through June 30, 2021) approximately 17% were over-collateralized,” the SEC said in its cease-and-desist order, published today.
According to the regulator, BlockFi made no distinction between clients’ and its own assets when running its business.
“BlockFi pooled the crypto assets it borrowed, and commingled and rehypothecated these crypto assets received from investors in the BIAs with BlockFi’s other assets, including collateral received from institutional borrowers,” the SEC said.
The regulator went on to explain that BlockFi had made risky bets with this pool of money in order to fund the interest rates it promised investors.
“As BlockFi took ownership of the loaned crypto assets from investors in the BlockFi Interest Accounts (BIAs), [it] used the commingled assets to, among other things, make loans to institutional and retail borrowers, stake crypto assets, and purchase crypto asset trust shares and interests in private funds,” it went on.
In April last year, critics of BlockFi’s business approach alleged that the firm had bolstered the returns it promised clients by making proprietary trading bets, in particular using a temporary arbitrage opportunity involving the Grayscale Bitcoin investment trust.
In addition to paying $50m to settle the SEC’s charges, BlockFi today agreed to cease its unregistered offers and sales of its lending product and interest accounts.
It also said it would attempt to bring its business within the provisions of the US Investment Company Act within 60 days.
less than a quarter of BlockFi’s loans of cryptocurrency to institutions had full collateral backing
BlockFi’s parent company also announced that it intends to register under the Securities Act of 1933 the offer and sale of a new lending product.
In parallel actions announced today, BlockFi also agreed to pay an additional $50 million in fines to 32 US states to settle similar charges.
According to the SEC, BlockFi’s assets reached $14.7bn by March last year but had fallen to $10.4bn on December 8.
Today’s $100m in fines therefore represent about 1 percent of the lending platform’s total assets.
Since August last year, BlockFi has slashed the interest rates it promises investors depositing bitcoin, from 6.2 percent on deposits of up to 25 bitcoin to only 0.1 percent on deposits exceeding 0.35 bitcoin.
Competing cryptocurrency lending platforms such as Celsius and Nexo offer up to 8 percent annual interest on deposits of bitcoin and higher rates on deposits of other cryptocurrency.
Celsius, for example, promises over 10 percent annual interest on deposits of the dollar stablecoin tether, way above the interest rate on dollar deposit accounts in a bank.
According to Gary Gensler, the SEC’s chairman, cryptocurrency lending platforms will have to adhere to the US securities regulations if they wish to do business in the country.
“This is the first case of its kind with respect to crypto lending platforms,” he said when announcing the BlockFi fine.
“Today’s settlement makes 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.”
“It further demonstrates the Commission’s willingness to work with crypto platforms to determine how they can come into compliance with those laws. I’d like to thank and commend our remarkable SEC staff and state regulators for their efforts and collaboration on this settlement,” said Gensler.
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