Crypto Lenders Continue to Dance With Regulators, BlockFi Agrees to Pay $100M in Fines

Published on 02/19/2022

US regulators are cracking down on crypto lending firms. Accounts paying interest on cryptocurrency deposits have grown in popularity among cryptocurrency enthusiasts. Other companies offering high-yield crypto accounts include Nexo, Celsius Network, and Eco. Interest rates on certain Celsius Network products can be as high as 17%. The Securities and Exchange Commission (SEC) has accused BlockFi Lending LLC (BlockFi) of failing to register offers and sales of its retail crypto lending product. In this first-of-its-kind action, the SEC also accused BlockFi of violating the registration provisions of the Investment Firms Act of 1940. To settle the SEC charges, BlockFi agreed to pay a fine of $50 million, to cease its unregistered offers. and sales of the loan product, BlockFi Interest Accounts (BIAs), and is attempting to bring its business into compliance with the provisions of the Investment Firms Act within 60 days. BlockFi’s parent company also announced plans to register under the Securities Act of 1933 the offering and sale of a new loan product. In the announced parallel actions, BlockFi agreed to pay an additional US$50 million in fines to 32 states to settle similar charges. BlockFi is the first to reach a settlement with the SEC that requires it to treat its products as registrable securities. For BlockFi, the SEC says more than 24% of institutional crypto asset lending in 2019 was overcollateralized; in 2020, around 16% were oversized; and in 2021 (through June 30, 2021), approximately 17% were oversized.

“This is the first such case with respect to crypto lending platforms,” ​​SEC Chairman Gary Gensler said in a Feb. 14, 2022 press release. Today makes it clear that crypto markets must comply with proven 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 comply with these laws. I would like to thank and commend our outstanding staff at the SEC and state regulators for their efforts and cooperation with this rule.”

SEC Chairman Gary Gensler has pointed to the crypto lending industry as an area federal officials are scrutinizing.

According to the SEC order, from March 4, 2019 to February 14, 2022, BlockFi offered and sold BIAs to the public. Through BIA, investors loaned crypto assets to BlockFi in exchange for the company’s promise to provide a variable monthly interest payment. The order concludes that BIAs are securities under applicable law, and the company was therefore required to register its offers and sales of BIAs but either failed to do so or could not benefit from an exemption registration with the SEC. Additionally, the order finds that BlockFi operated for more than 18 months as an unregistered investment firm because it issued securities and also held more than 40% of its total assets, excluding cash, in securities. investment, including lending crypto assets to institutional borrowers.

The order also finds that BlockFi has made a false and misleading statement for more than two years on its website regarding the level of risk in its loan portfolio and lending activity. Without admitting or denying the SEC’s findings, BlockFi agreed to a cease and desist order prohibiting it from violating the registration and anti-fraud provisions of the securities law and the registration provisions of the securities law. investment companies. BlockFi also agreed to stop offering or selling BIAs in the United States. The SEC found that BlockFi operated as an unregistered investment firm and could not register as such because it issues debt securities. BlockFi will need to obtain a registration exemption or exclusion.

In August 2019, BlockFi raised US$18.3 million in Series A funding. Valar Ventures led and was joined by Winklevoss Capital, Morgan Creek Digital, Akuna Capital, Galaxy Digital Ventures, and ConsenSys Ventures. BlockFi secured a US$30 million Series B in February 2020. The Series B was led by Peter Thiel’s Valar Ventures with participation from recurring investors Morgan Creek Digital, PJC, Akuna Capital, CMT Digital, Winklevoss Capital and Avon ventures. New investors included Castle Island Ventures, Purple Arch Ventures, Kenetic Capital, Arrington XRP Capital and HashKey Capital. In August 2020, BlockFi raised US$50 million in Series C funding led by Morgan Creek Digital. Other participating investors include Valar Ventures – BlockFi’s Series A and B lead investor – CMT Digital, Castle Island Ventures, Winklevoss Capital, SCB 10X, Avon Ventures, Purple Arch Ventures, Kenetic Capital, HashKey, Michael Antonov, Gamer NBA Matthew Dellavedova, and two college endowments. In March 2021, BlockFi completed its Series D fundraising, led by new investors including DST Global partners Bain Capital Ventures, Pomp Investments, and Tiger Global. The US$350 million Series D round includes participation from Susquehanna Government Products, LLLP, Bracket Capital, Paradigm, Valar Ventures, Morgan Creek Digital, Akuna Capital, PJC, Hudson River Trading, ParaFi Capital, Jump Capital, Pacific Century Group, Gaingels, Third Prime, Kenetic, CMS Holdings, Breyer Capital, The Venture Collective and Castle Island Ventures.

Earlier the SEC threatened to sue Coinbase over its Lend product project, Coinbase immediately shut down the product. BlockFi has gone ahead with its crypto lending product. Celsius Network has come under intense state and federal scrutiny. Celsius found itself in the crosshairs of market regulators in Texas and New Jersey. Celsius Network has hired a new CFO – Rod Bolger. In November 2021, Celsius chief financial officer Yaron Shalem was one of seven people arrested in Tel Aviv in connection with Israeli crypto mogul Moshe Hogeg. Shalem joined Celsius earlier in 2021. From January 2014 to March 2018, Shalem worked as CFO for Singulariteam, a venture capital firm launched by Hogeg.

Celsius responded at the time, “Although in no way related to the employee’s time or work at @CelsiusNetwork, the employee was immediately suspended. We have also verified that no assets have been misplaced or mishandled,” the tweet read.

In October 2021, Celsius Network raised US$400 million in an investment led by WestCap, a growth capital firm, and Caisse de depot et placement du Quebec (CDPQ), a public plan investor. of retirement. The transaction reflects a valuation of over US$3 billion for Celsius. Celsius reported that as of October 8, 2021, total assets had crossed the US$25 billion threshold – including more than one million registered customers on the platform. The CDPQ considers blockchain technology to be potentially disruptive to many sectors of the traditional economy. Celsius CEO Alex Mashinsky was pleased with the fundraising, as backing from a Canadian public pension fund gives the company more credibility. CDPQ and WestCap expressed confidence in Celsius and assured the crypto lender was working with regulators. Novatel Wireless Inc. fired CEO Alex Mashinsky in October 2015. Novatel was best known for its Mi-Fi wireless hotspot product. Like many telecommunications and technology executives, Mashinsky embraced crypto and jumped on the bandwagon.

On February 18, 2022, Nexo revealed that it would stop paying interest on new deposits from US customers. “Registered Nexo customers who currently earn interest on the platform will continue to do so only on their existing digital asset balances,” the company said, explaining:

“Reloads of your Nexo wallets made after today will not earn interest until the restructuring of the interest product and the registration process with the relevant regulatory bodies is completed, in accordance with recently received guidelines. Once complete, all new accounts will be transferred to the Earn Interest 2.0 product and new top-ups will earn interest.Please note that if you withdraw any of the assets from your current balance, you will not be able to earn interest on those here, even on their later return.”

For new accounts, “Nexo’s interest product in its current form will not be available to new customers, until the restructuring of the interest product and the registration process with the relevant regulatory bodies. be finalized, in accordance with the directives recently received”.

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