BlockFi’s $100M Settlement Payment is Disproportionate, Says Hester Peirce

BlockFi recently agreed to pay $100 million in a settlement after the U.S. Securities Exchange Commission (SEC) charged the firm with “failing to register the offers and sales of its retail crypto lending product.”

The news that kept the space abuzz was broken by an SEC document, followed by a dissent note from Commissioner Hester M. Peirce – both put out on the SEC website.

The Genesis of Trouble for BlockFi

BlockFi has been offering interest-bearing accounts for crypto deposits for several years. The variable interest rates offered on these accounts topped 9% annually, significantly higher than any other such product.

The SEC said in its release that the company was found violating the provisions of the Investment Company Act of 1940 by promising to pay interest on deposits while not being registered with the Commission to be able to do so legitimately.

BlockFi began facing troubles from the regulators in July last year when the New Jersey Bureau of Securities asked it not to accept payments for its BIA plan from local customers.

The SEC move to charge BlockFi for its “unregistered” crypto lending products that earned high-yield interest rates first came to light in November last year when some media outlets broke the story.

Details of the BlockFi-SEC Settlement

As per the settlement, BlockFi will pay $50 million to the SEC in penalty and another $50 million to 32 states where the crypto lending platform faces similar charges. The company will also stop offering “unregistered offers and sales of the lending product.” The SEC asked BlockFi to get its lending business registered under the Investment Company Act of 1940.

“This is the first case of its kind with respect to crypto lending platforms,” SEC chair Gary Gensler said. “Today’s settlement makes clear that crypto markets must comply with time-tested securities laws,” he elaborated.

A Financial Times report reads that over half a million people had invested over $10 billion in BlockFi as of December 8, 2021. The firm was valued at $3 billion in March 2021, with Bain Capital Ventures and Tiger Global Management being lead investors.

Director of the SEC’s Enforcement Division, Gurbir Grewal, handed out a general warning to all such players who are offering interest-bearing accounts but are not registered with the SEC.

“Crypto lending platforms offering securities like BlockFi’s BIAs should take immediate notice of today’s resolution and come into compliance with the federal securities laws,” he said.

Does the SEC Action Clarify a Legal Grey Area?

The major buzz in the industry was around the $100-million fine imposed on BlockFi and Commissioner Peirce’s lengthy but passionate note that termed the penalty “disproportionate” for offering investors a healthy return. Nevertheless, there were some who found a silver lining in the development for the crypto industry.

First among them was BlockFi CEO Zac Prince, who put out a series of tweets and a press note, terming it a huge day for BlockFi and its interest-bearing product, the BIA. Aside from explaining the details and how it affects or doesn’t affect investors, Prince elaborated on the settlement in the press release.

“BlockFi cooperated with the government’s investigation and implemented remediation actions. Both the SEC and state-level agreements contain no admission or denial of wrongdoing or liability,” he asserted.

Another noteworthy comment came from the Head of Policy at Blockchain Association, Jake Chervinsky, who noted how the SEC action has in a way facilitated “the path to regulatory clarity.”

Summing up Commissioner Peirce’s note of dissent in a simple language, Chervinsky said, “Comm’r Peirce eloquently dissents and identifies the main issue with BlockFi settlement: the risk of the SEC saying “you can offer this product if you register first,” but then refusing to allow the registration. An SEC rug pull, if you will. Let’s hope that’s not what this is.”