Crypto Firm Pays $50 Million to Settle with SEC

Chair Gensler has frequently discussed crypto assets and the need for additional action by Congress in the form of legislation. The Enforcement Division at the Commission has periodically brought actions centered on crypto transactions, alleging that the assets involved are securities in the form of an investment contract within the meaning of the Supreme Court’s seminal decision in SEC v. W. J. Howey Co., decided in 1946.

In its most recent case involving crypto, the agency has, at last in part, adopted a different approach. While Howey is cited in the new case, a key part of the analysis turned on a claim that the crypto assets involved were notes within the definition of that term in Reves v. Ernst & Young, 494 U.S. 56 (1990). In the Matter of Blockfi Lending LLC, Adm. Proc. File No. 34503 (February 14, 2022).

Named a respondent in the action is BlockFi, a firm formed in 2018 that is a wholly owned subsidiary of BlockFi Inc., a financial services company. Beginning in early 2019 Respondent began selling BlockFi Interest Accounts or BIAs to investors. Thorough those accounts investors could lend crypto assets to BlockFi in exchange for a promise to receive a variable monthly interest payment. The funds to pay the interest were generated by deploying the firm’s assets in various ways including loans of crypto assets to institutional corporate borrows, lending U.S. dollars to retail investors, and investing in equities and futures.

The case turned on the manner in which BlockFi generated the funds to pay the variable rate of interest in exchange for investors lending their crypto assets. The assets were borrowed in exchange for a promise to repay with interest. Investors loaned the crypto assets based on BlockFi’s statements about how it would generate the yield to pay the BIA investors interest. Through those transactions investors had a reasonable expectation that BlockFi would use the invested crypto assets in BlockFi’s lending and investing activity and that investors would share in the profits from those transactions BlockFi also made a material false statement on its website concerning its collateral practices.

In resolving the proceedings, the firm agreed to implement a series of undertakings. The Order alleges violations of Securities Act Sections 5(a), 5(c) and 17(a)(2) and (3).

To resolve the proceedings Respondent consented to the entry of a cease-and-desist order based on the Sections cited in the Order. Respondent also agreed to pay a penalty of $50 million.