Landmark Crypto Settlement Still Leaves Big Question Unanswered

Cryptocurrency platform BlockFi Lending counts “pragmatic pioneering” among its values. According to the company website, that means aspiring to “inspire clients to think about wealth management differently” and “changing the status quo.”

BlockFi did some pioneering of a more inauspicious sort this month in reaching a $100 million settlement with the Securities and Exchange Commission and state regulators – the SEC’s $50 million portion is the agency’s largest penalty to date against a cryptocurrency company. The case also broke new ground in offering clarity on how the SEC views crypto lending products. The commission failed, however, to address a larger question that has kept crypto’s regulatory future in limbo.

In announcing the settlement, the SEC noted that the “first-of-its-kind action” involved charging BlockFi with failing to register offers and sales of its BlockFi Interest Accounts. Essentially, the BIAs enabled BlockFi customers to lend their crypto holdings to the company under an agreement that BlockFi would return a variable monthly interest payment.

The SEC found BIAs qualified as securities that should have been registered with the agency. The agency also determined that because BlockFi issued securities and held more than 40% of its assets in investment securities, it was operating as an unregistered investment company. For good measure, the SEC charged BlockFi with making a false or misleading statement on its website regarding the risk of its loan portfolio and lending. (For its part, BlockFi did not admit or deny wrongdoing)

“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,” said SEC Chair Gary Gensler in announcing the deal with BlockFi. But that may be overstating the case.

As Compliance Week columnist Aaron Nicodemus noted, the BlockFi decision does constitute a landmark development for the crypto sector. The agreement with BlockFi to register its lending product as a security seemingly paves the way to regulate all crypto lending products. However, we still don’t have an answer to the sector’s biggest regulatory question: Are cryptocurrencies securities or currencies? If crypto is a currency, after all, it isn’t up to the SEC to regulate it.

Frankly, the currency-security debate around crypto passed the point of getting old long ago. Complaints that once sounded like histrionics about uncertainty have gained greater poignancy over time. We’ve been writing about it at Intelligize since 2018. People inside and outside of the SEC have belabored the question for nearly as long.

No one can deny that crypto doesn’t fit neatly into either category. Unfortunately, no new information is coming to settle the matter once and for all. Until the markets have a better understanding of what digital assets are from a regulatory standpoint, it seems hard to believe that crypto issuers will automatically fall in line with securities laws.