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.[1] 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.[2] 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.[3] 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.[4] 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.


[1]In the Matter of BlockFi Lending LLC, Admin. Proceeding No. 3-20758 (Exchange Release No. 11029) (Feb. 14, 2022).

[2] 328 U.S. 293, 298–99 (1946).

[3] 494 U.S. 56, 66–67 (1990).

[4]U.S. Sec. & Exchange Comm’n, Investor Bulletin: Crypto Asset Interest-bearing Accounts (Feb. 14, 2022).

Print:
Email this postTweet this postLike this postShare this post on LinkedIn
Photo of Barbara A. Jones Barbara A. Jones

Barbara A. Jones is a member of the firm’s Global Securities practice group and serves as Co-Chair of the firm’s interdisciplinary Blockchain & Cryptocurrency practice group. She is also co-coordinator of the firm’s interdisciplinary Conflict Minerals Compliance Initiative. Barbara maintains a diverse corporate

Barbara A. Jones is a member of the firm’s Global Securities practice group and serves as Co-Chair of the firm’s interdisciplinary Blockchain & Cryptocurrency practice group. She is also co-coordinator of the firm’s interdisciplinary Conflict Minerals Compliance Initiative. Barbara maintains a diverse corporate and securities law practice across industry groups, emphasizing complex international and domestic transactions, including blockchain and cryptocurrency transactions, private and public financings (including token offerings), dual listings, mergers and acquisitions, strategic collaborations and joint ventures, and licensing transactions. Her practice includes serving as a trusted advisor to public and private company boards of directors on governance and complex regulatory reporting and compliance issues. Barbara’s clients include financial institutions, private equity and venture capital groups, and companies in blockchain, life sciences and biotechnology, information technology, energy (traditional and renewable), mining, defense and security, telecommunications, media, entertainment and sports. Barbara is also active in the representation of Olympic athletes and sports-related organizations.

Barbara practiced U.S. law in London from 1990 through 2003, and headed the international capital markets practice of a major U.S. law firm from 1999 to 2003 before relocating to Boston. From 1997 to 1999, she served as Vice-President, Assistant General Counsel and Regional Counsel for capital markets with J.P. Morgan Securities Ltd. in Europe, the Middle East and Africa. Since returning to the U.S., she has continued to actively represent public and private companies, private equity groups and investment banks in the European, Scandinavian, African and greater Asian markets, including China.

Barbara is a past chair of the ABA’s Subcommittee on International Securities Matters. She is a frequent speaker at conferences relating to cross-border securities matters and strategic alternatives.

Photo of William Mack William Mack

William B. Mack is a co-chair of the Financial Regulatory and Compliance Practice. He is experienced in advising companies on regulatory and compliance matters relating to the Securities and Exchange Commission regulations, the Exchange Act, Anti-Money Laundering laws and Financial Industry Regulatory Authority

William B. Mack is a co-chair of the Financial Regulatory and Compliance Practice. He is experienced in advising companies on regulatory and compliance matters relating to the Securities and Exchange Commission regulations, the Exchange Act, Anti-Money Laundering laws and Financial Industry Regulatory Authority (FINRA) rules.

William’s practice involves all aspects of broker-dealer regulation, including Self-Regulatory Organization (SRO) membership, supervision, employment, research, soft dollar arrangements, chaperoning of foreign broker-dealers, social media, use of foreign finders, anti-money laundering rules, alternative trading systems (ATS), exchanges, and market making issues. He also provides regulatory guidance to investment banking clients in connection with securities offerings and related trading issues.

Photo of Matthew Hoxsie Matthew Hoxsie

Matthew P. Hoxsie is a member of the Litigation and Appeals & Legal Issues practice groups, resident in the firm’s Phoenix office. Matthew is focused on efficient business-driven strategies across a wide-range of practice areas, from business litigation (including appeals) to securities compliance…

Matthew P. Hoxsie is a member of the Litigation and Appeals & Legal Issues practice groups, resident in the firm’s Phoenix office. Matthew is focused on efficient business-driven strategies across a wide-range of practice areas, from business litigation (including appeals) to securities compliance and blockchain guidance, with a strong focus on civil and appellate procedure.

Business and Class Action Litigation

Matthew’s litigation experience spans a wide range of civil matters, including consumer class action, breach of contract, antitrust, False Claims Act, securities, and other complex commercial disputes, before both state and federal trial courts. In particular, Matthew has considerable experience representing clients defending putative Telephone Consumer Protection Act (“TCPA”) class action suits. Matthew has deep knowledge of the applicable federal statute and regulation – 47 U.S.C. § 227 and 47 C.F.R. § 64.1200 – and the various defenses to plaintiff’s claims, both on a named-plaintiff and class-wide basis.

Appeals and Legal Issues

Matthew’s appellate and legal issues practice includes representing clients on constitutional, statutory, and administrative claims. He has represented clients before both divisions of the Arizona Court of Appeals, the Arizona Supreme Court, the Ninth Circuit Court of Appeals, the United States Securities and Exchange Commission, and the D.C. Circuit Court of Appeals. Matthew also regularly advises government agencies and corporate clients on constitutional, statutory, and regulatory compliance.

Blockchain & Digital Assets

As a member of Greenberg Traurig’s Blockchain & Digital Assets Group, Matthew advises clients with respect to financial regulation and securities compliance of DeFi structures, NFT exchanges and cryptocurrency platforms, conducts comprehensive risk assessments regarding varying regulatory and business concerns, and develops effective Terms and Conditions and other documents and disclaimers.

Photo of Kyle Jaep Kyle Jaep

Kyle Jaep is a member of the Corporate Practice in Greenberg Traurig’s Los Angeles office. Kyle focuses his practice on capital markets, securities reporting, venture capital financing, and general corporate governance matters. He is a member of the firm’s interdisciplinary Blockchain & Digital…

Kyle Jaep is a member of the Corporate Practice in Greenberg Traurig’s Los Angeles office. Kyle focuses his practice on capital markets, securities reporting, venture capital financing, and general corporate governance matters. He is a member of the firm’s interdisciplinary Blockchain & Digital Assets Group.