Feb 16, 2022 - Economy

BlockFi's settlement spillover

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Illustration: Aïda Amer/Axios

BlockFi's $100 million settlement on Monday could have broader implications for the crypto lending industry.

Why it matters: High-yield crypto savings accounts — marketed as an inflation hedge and a less-risky way to invest in digital assets — have become popular in the sector.

  • Gemini, Circle, Celsius, Voyager and Crypto.com all offer various types of high-yield crypto products.
  • Bloomberg reported last month that some of those companies are under investigation by the SEC, which suggests more enforcement action to come.

The background: BlockFi agreed to pay a $100 million fee to settle allegations from the SEC and state regulators that it violated securities law and misled investors about the risks related to its high-yield crypto savings accounts.

  • In charging BlockFi, the SEC explicitly stated it views these types of accounts as securities and that they should be regulated as such.

What it means: Industry pundits cheered the decision for providing a regulatory roadmap for offering these products — and for showing the agency is open to allowing such services at all.

  • Still, the devil is in the details for how crypto lenders eventually reach compliance.

What they're saying: Seward & Kissel's Philip Moustakis, a former senior counsel in the SEC's Enforcement Division, said he would not be surprised if that division were to announce a crypto lending initiative to bring the rest of the industry into compliance.

  • He said that initiative could include a "template settlement that respondents will receive if they come forward, cooperate, remediate, and agree to come into compliance."

Yes, but: Crypto supporters have long argued that existing regulatory frameworks don't fit perfectly into this new world, and believe that enacting onerous regulations could deter web3 innovation.

  • In a dissenting statement on the BlockFi case, SEC Commissioner Hester Peirce wrote, "Rather than forcing transparency around retail crypto lending products, today’s settlement may stop them from being offered to retail customers in the United States."

What we're watching: BlockFi has already announced that it intends to register a new lending product to be offered and sold under existing securities laws.

  • That leaves BlockFi with at least one more hurdle to jump through — showing the SEC that the product will be compliant, while also still offering attractive yields in the face of greater regulation.
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