SEC Says BlockFi Misrepresented Risk to Crypto Depositors In $100M Order
Crypto lender BlockFi has agreed to pay $100M to settle charges that it misrepresented risks to depositors.
By: Brady Dale •DeFi News
The U.S. Securities and Exchange Commission (SEC) alleges that crypto lender BlockFi inaccurately described the level of risk its depositors were exposed to, in an order explaining a $100M settlement between BlockFi and federal and state securities regulators.
“BlockFi made a material misrepresentation to BIA [BlockFi Interest Account] investors concerning the level of risk in its loan portfolio,” the order signed by SEC Secretary Vanessa Countryman stated. “BlockFi made a statement in multiple website posts that its institutional loans were ‘typically’ over-collateralized, when in fact, most institutional loans were not.”
The SEC findings illuminate one of the key differences between centralized financial offerings and those made through decentralized finance lending and saving platforms, where the positions and terms for each depositor and lender are verifiable on the blockchains they run atop.
Rumors of a forthcoming settlement from BlockFi were first reported by Bloomberg on Friday night, with confirmation coming Monday morning when both BlockFi and the SEC put out press releases with the news. BlockFi did not admit or deny the SEC findings.
The order contends that BlockFi made it sound as though depositing crypto with the company was safer than it really was.
The SEC claims that BlockFi represented those deposits and the interest paid on them as secured by loans to institutional customers that tended to be over-collateralized. In decentralized finance (DeFi), loans are almost always made against collateral worth significantly more than the loan, because the lenders have no recourse without such guarantees. This engenders one of the most frequent critiques of DeFi; that its offerings are not capital efficient.
BlockFi’s institutional borrowers appear to have been unwilling to accept similar conditions that DeFi users often do. According to the SEC’s investigation, from 2019 to early 2021, the rate of over-collateralization from BlockFi’s institutional borrowers fell from 24 to 17%.
“When BlockFi began offering the BIA investment, it intended to require over-collateralization on a majority of its loans to institutional investors, but it quickly became apparent that large institutional investors were frequently not willing to post large amounts of collateral to secure their loans,” the order explained.
The SEC found that BlockFi’s website represented the loans as “typically” over-collateralized, but depositors had no way to verify this. This stands in contrast to borrowers in decentralized finance, whose collateralized positions are viewable on-chain.
Under the order, BlockFi will discontinue new accounts and new deposits for U.S. customers using the BlockFi Interest Accounts.
According to BlockFi’s release, existing accounts will continue to accrue interest and will become a new kind of account called BlockFi Yield once the company achieves SEC registration for that product. Under the order, the company is meant to come into compliance one way or another within 60 days.
The $50M owed to the SEC will be paid in a series of payments over a two-year period, with the first $10M payment due in 14 days, according to the order. The other $50M will be distributed among 32 U.S. states.
BlockFi’s co-founders Zac Prince and Flori Marquez took to Twitter today to represent the $100M settlement as a success for the company and its depositors. “We achieved what has always been our goal: to allow all clients – including those based in the US – to earn interest on their crypto,” Marquez tweeted in a Monday thread.
BlockFi has raised $450M in funding through its series D round announced in March 2021. The company was not immediately available for further comment to The Defiant.
“Today’s settlement makes clear that crypto markets must comply with time-tested securities laws, such as the Securities Act of 1933 and the Investment Company Act of 1940,” SEC Chair Gary Gensler said in a statement.