Regulatory Monitor SEC Update

Published date14 July 2022
Subject MatterCorporate/Commercial Law, Technology, Corporate and Company Law, Securities, Fin Tech
Law FirmMayer Brown
AuthorMs Leslie Cruz

Crypto Lending Platform Operated as an Unregistered Investment Company

In February 2022, the Securities and Exchange Commission (SEC) charged BlockFi Lending LLC (BlockFi), a wholly-owned subsidiary of BlockFi, Inc., with violating Section 7 of the Investment Company Act of 1940 (1940 Act), among other federal securities laws.1 This was a first case with respect to crypto lending.2 BlockFi agreed to pay a $50 million civil penalty, cease offering and selling its interest-bearing accounts in the United States, and attempt to bring its business within the provisions of the 1940 Act.3 In parallel actions announced on the same day, BlockFi agreed to pay an additional $50 million in fines to over 30 states to settle similar charges. In addition, on the same day, the SEC's Office of Investor Education and Advocacy and Enforcement's Retail Strategy Task Force issued an Investor Bulletin on Crypto Asset Interest-bearing Accounts.

According to the SEC, for about three years, BlockFi offered and sold interest bearing accounts to the general public to obtain crypto assets in order to run its lending and investment activities to pay interest to account investors. Through these accounts (which were promoted as investments), investors lent crypto assets to BlockFi in exchange for BlockFi's promise to make variable monthly interest payments. BlockFi generated the interest to be paid to investors by, among other things, lending crypto to institutional and corporate borrowers, lending US dollars to retail investors, and investing in equities and futures.

BlockFi set the interest rates payable on the accounts based, in part, on the yield that it could generate from its lending and investment activities, and thus the rates were correlated with BlockFi's efforts to generate that yield. BlockFi periodically adjusted its interest rates payable on the accounts in part after analysis of current yield on its investment and lending activity. BlockFi regularly touted the profits investors may earn by investing in an account and offered and sold the accounts to retail and other investors by way of its public website. BlockFi also promoted the accounts through social media. BlockFi did not have a registration statement filed or in effect with the SEC for the offer and sale of the accounts, and no exemption was available under the Securities Act of 1933 (1933 Act).

BlockFi pooled the crypto assets it borrowed from account investors, and commingled and rehypothecated these assets with BlockFi's other assets, including collateral received from institutional borrowers. BlockFi took ownership of the loaned crypto assets from investors in the accounts, and used the commingled assets in its own business 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. These assets generated income both for BlockFi and to pay interest to account...

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