SEC Settles Charges Against BlockFi Loans – Technology


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On February 14, 2022, in one of the largest sanctions ever imposed in the crypto space, the Securities and Exchange Commission (SEC) settled charges against BlockFi Lending LLC (BlockFi).1 The SEC has accused BlockFi of failing to register as an “investment firm” and failing to register its retail crypto lending product, BlockFi Interest Accounts (BIAs), as securities. The SEC also accused BlockFi of making materially false and misleading statements regarding the risks associated with BIAs. Although this is the SEC’s first enforcement action against a crypto lending platform, SEC activity in the crypto space is escalating significantly.2


As of March 2019, BlockFi offered and sold BIAs to the public in the United States. BlockFi touted BIAs as a tool for investors to “build their wealth” and promoted “great [interest] rates.”3 Investors could lend crypto assets to BlockFi and, in exchange, receive monthly crypto interest payments. The returns generated for BlockFi and BIA investors were directly related to BlockFi pooling the loaned crypto assets and lending and investing the pooled assets at its sole discretion. As of December 2021, BlockFi held approximately $10.4 billion in crypto assets from BIA investors.

The critical case for determining whether a product is a “security” is defined under SEC vs. WJ Howey Co. (the “Howey Test”).4 The SEC has concluded that the BIAs are securities under the Howey Test because there was (1) an investment of money, (2) in a joint venture, (3) with a reasonable expectation of profit, (4) as a result of the efforts of others. In addition, the SEC concluded that the BIAs were “ratings” and therefore securities under the test set forth in Reves v. Ernst & Young.5 Under dreams, a “note” is presumed to be a security unless it meets or resembles a category of exceptions, such as a note secured by a mortgage on a house. BIAs do not fall under the categories created by the judiciary, nor do they have a “family resemblance” to the exceptions, since BlockFi has widely advertised and sold BIAs to the public as investments that would yield high returns on BIAs. loaned crypto assets, while BlockFi used the loaned. crypto assets to operate its core business. Important for this analysis, there is no alternative regulatory regime with respect to ZACs.

Consequently, given that the BIAs were securities falling under both the Howey test and the dreams test, BlockFi should have filed a registration statement with the SEC for the offering and sale of BIA. Exceptions to registration may apply, for example, if a company only offers the product to a limited number of qualified investors. Here, however, BlockFi has marketed BIAs to a large segment of the general public.

In addition, the SEC found that BlockFi made materially false and misleading statements when offering and selling securities under Sections 17(a)(2) and 17(a)(3) of the Securities Act. BlockFi published several articles on its website regarding the risk level of its loan portfolio, stating that institutional loans made by BlockFi were “generally” over-collateralized, while only about 17% of its crypto loans were over-collateralized from 2020 to June 2021. Accordingly, BlockFi has not provided complete and accurate information regarding the risks to investors in the offering and selling of BIAs (reputable securities under the tests described above).

Finally, the SEC found that BlockFi violated Section 7(a) of the Investment Company Act by failing to register as an investment company. As BIAs meet the definition of securities, BlockFi was therefore an issuer of securities and, from at least December 31, 2019 to at least September 30, 2021, held assets meeting the definition of “investment securities” whose value exceeded 40% of its total assets as set out in Section 3(a)(1)(C) of the Investment Companies Act. During this period, BlockFi was not registered as an investment firm and did not benefit from any legal exemption or exclusion by seeking an order from the SEC.

The rule

As part of the settlement, BlockFi agreed to pay $50 million to the SEC and $50 million to thirty-two states in a parallel action, signaling cooperation between federal and state regulators. BlockFi also agreed to stop offering BIAs to new investors in the United States and to stop accepting further investments from current BIA investors in the United States. BlockFi said in a press release that it intends to submit an S-1 form to the SEC for a new investment product that, if approved, would be the first interest-bearing crypto security registered with the SEC. the SEC.6 For now, BlockFi will not be allowed to engage in crypto lending in the United States until it registers its new crypto lending product on Form S-1, which may be an “iterative process several months”.7 especially when cryptography is involved. Additionally, the SEC found BlockFi to operate as an unregistered investment firm. However, because BlockFi issues debt securities, it cannot register as an investment company and will need a registration exemption or exclusion.8 It remains to be seen whether this is feasible within the sixty-day time limit given to BlockFi under the terms of the settlement, even if a thirty-day extension is granted.

In a pointed statement in response,9 Commissioner Hester M. Peirce questioned whether the SEC’s application of the securities regulatory framework to crypto lending was the most effective way to protect customers from crypto lending. After all, she said, there is no allegation here that BlockFi failed to pay its customers the money they are owed. She argued that such regulations could prevent the offering of crypto loans to customers in the United States. Far more important, she says, is encouraging crypto firms to “come in and talk to [the SEC]to encourage transparency around the terms and risks of crypto lending products. BlockFi’s misrepresentations were, in his view, BlockFi’s greatest failure, but, even so, disproportionate to the combined $100 million penalty.

Look forward

As Commissioner Peirce predicts, the order is likely to have far-reaching consequences for the crypto lending industry in the United States. The SEC previously made it clear that it was considering crypto lending products when it forced Coinbase to cancel its plans to roll out a crypto lending product in September 2021.ten The increasing scrutiny of crypto lending products demonstrates that these and similar products are under close scrutiny from state and federal regulators. The regulatory burden may be too demanding for smaller players in the crypto space, which could be forced to withdraw these products altogether, despite their popularity with investors. Other companies offering similar products in the United States will either have to make their products compliant with securities regulations or face enforcement action.

State and federal law enforcement agencies agree that the roughly $3 trillion crypto industry needs clearer regulation. It remains to be seen how the SEC will approach decentralized platforms like DeFi and DAOs, or whether a completely new regulatory framework will emerge to deal with these innovations. U.S. Assistant Treasury Secretary Wally Adeyemo recently noted that the U.S. government is seeking to create a regulatory landscape “that promotes responsible innovation, by writing clear rules of conduct that mitigate those risks while preserving the economic opportunities created by this technology.11 While the legal analysis of the SEC order against BlockFi is not final and BlockFi has not admitted any wrongdoing, it is the clearest guidance available for crypto lending platforms operating in the states. -United.

If you would like to know more about the issues in this alert, please contact your usual contacts at Ropes & Gray.



2 See, for example,;


4 SEC vs. WJ Howey Co.328 US 293, 301 (1946).

5 Reves v. Ernst & Young494 US 56, 64-66 (1990).



8 To see Section 18 of the Investment Company Act of 1940, 15 USC § 80-18. See also




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