On Feb. 14, 2022, the Securities and Exchange Commission (SEC) charged crypto lending platform BlockFi Lending LLC (BlockFi) with (1) failing to register the offers and sales of its crypto lending product under the Securities Act of 1933, (2) making a material misrepresentation and omission regarding the level of risk in its loan portfolio, and (3) violating the registration provisions of the Investment Company Act of 1940. BlockFi agreed to settle the charges by paying a $50 million penalty directly to the SEC, and to pay an additional $50 million to 32 states to settle similar charges.
Beginning in March 2019, BlockFi offered and sold BlockFi Interest Accounts (BIAs) to investors, through which investors lent crypto assets to BlockFi in exchange for BlockFi’s promise to provide a monthly interest payment. This interest payment was generated in part by BlockFi lending BIA investors’ assets to institutional and corporate borrowers, and the interest rate paid to BIA investors varied based on BlockFi’s expected yield from its lending and other activity.
The SEC argued that this arrangement caused the BIAs to be securities for purposes of federal securities law because they were “investment contracts” under Howey. In support, the SEC reasoned that each investor’s fortune was tied to the fortunes of BlockFi and the other investors because BlockFi pooled investors’ assets and paid interest that varied with the success of Blockfi’s asset management, and further, that BlockFi’s public statements regarding its asset management instilled an expectation that investors would earn profits derived from such management. The SEC also argued that BIAs were securities because they were “notes” under Reves. In support, the SEC reasoned that BIAs were sold for the general use of BlockFi’s business and investors received interest payments in return, that BIAs were publicly offered and promoted as an investment, and that no other risk reducing factors existed. Because the offer and sale of BIAs as securities were not registered under, and did not qualify for an exemption from, the Securities Act of 1933, the SEC argued that their offer and sale violated the Act. Relatedly, the SEC argued that BlockFi marketed BIAs by making a materially false and misleading statement in violation of the Securities Act of 1933. BlockFi had posted on its website that its institutional loans were “typically” over-collateralized when in fact most institutional loans were not. Separately, the SEC determined that BlockFi had operated as an unregistered investment company in violation of the Investment Company Act of 1940 because its crypto loans and investments were “investment securities,” the value of which exceeded 40% of the value of BlockFi’s total assets.
Some commentators might see this outcome as a blow to the emerging decentralized finance (DeFi) ecosystem, but it is unclear whether this can be generalized to completely decentralized platforms in the DeFi space. Although BlockFi is sometimes referred to as a DeFi platform, it arguably engages in centralized financial management, which was at the crux of the SEC’s argument with respect to Howey. However, the SEC’s enforcement division remains focused on the crypto space, centralized or not. In its press release disclosing the order documenting the BlockFi charges and settlement, the SEC posted an investor bulletin highlighting the risks involved in offering financial products relating to crypto assets. The SEC has repeatedly warned in recent months it will not hesitate to act to protect investors from purported predatory practices in the crypto space – whether for failing to register under the Securities Act or Investment Company Act or for deceptive or misleading statements that place investors at risk. The implications for other DeFi lending platforms are clear in that it is likely the SEC will be scrutinizing other entities with similar products.
In the Matter of BlockFi Lending LLC, Admin. Proceeding No. 3-20758 (Exchange Release No. 11029) (Feb. 14, 2022).
 328 U.S. 293, 298–99 (1946).
 494 U.S. 56, 66–67 (1990).
U.S. Sec. & Exchange Comm’n, Investor Bulletin: Crypto Asset Interest-bearing Accounts (Feb. 14, 2022).