More on Blockfi’s $100 million settlement and other cryptocurrency exchanges offering interest accounts

The $100 million settlement in which the Cryptocurrency Exchange Blockfi agreed to pay $100 million dollars to settle its case with the federal and state government raises questions about similar exchanges offering interest-bearing accounts to their customers. The SEC Order sheds light on Blockfi’s lending activities and might also reflect on whether other cryptocurrency exchanges are facing similar regulatory scrutiny.

According to the SEC Order https://www.sec.gov/litigation/admin/2022/33-11029.pdf, Blockfi, a New Jersey-based financial services company offered and sold Blockfi Interest Accounts to investors. The investors lend their crypto assets to Blockfi in exchange for interest paid to them. Blockfi earned that interest by making loans to institutional investors and in lending U.S. dollars to retail investors and investing in equities and futures. The SEC said that the interest accounts are securities because they were “notes” and because Blockfi offered and sold the BIA’s as investment contracts as defined. So those are the basic background facts. However, the Order is more explicit as to what Blockfi did wrong. First, it says Blockfi misrepresented the level of risk in the interest accounts investment opportunity. Blockfi said on its website that institutional loans it made were typically over-collateralized but in fact, most institutional loans were not. Secondly, the SEC stated that Blockfi operated as an unregistered investment company. As Blockfi technically took ownership of the loaned crypto assets from investors in the Blockfi interest accounts, Blockfi used the commingled assets to make loans and to purchase crypto assets trust shares, and interest in private funds. The Investment Company Act covers any user that is engaged in the business of investing, reinvesting, owning, holding, or trading securities and owns the investment securities exceeding 40% of its total assets. It said Blockfi met those definitions but it wasn’t properly registered.

Blockfi is not the only crypto exchange offering crypto interest accounts. Recent news reports revealed that Gemini Trust and crypto lender Celsius Network are paying interest on virtual token deposits. Also in September, Coinbase proposed a lending program but subsequently stopped its plans for the lending service. As of the date of this writing, here are the top crypto savings accounts:

Hodlnaut up to 12.73%

Celsius Network 14.05%

Nexo up to 12%

Gemini up to 7.04%

Coinbase 4.00%

Crypto.com 6-12%

YouHodler up to 12%

Ledn 9.5%

Blockfi 8.25%

Whether the SEC will sanction any of these other crypto companies may depend on many of the factors set forth in the Order relating to Blockfi Lending. That is, do these companies come to own the assets in their accounts and whether they are misrepresenting the risk factors to the investors. A more detailed analysis will be forthcoming on these issues and the various exchanges in the near future.

JEFFREY NEWMAN REPRESENTS WHISTLEBLOWERS INCLUDING SEC WHISTLEBLOWERS IN CASES INVOLVING CRYPTOCURRENCY AND CRYPTO EXCHANGES. Jeffrey.newman1@gmail.com 617-823-3217