BlockFi’s $100m SEC penalty: What does this mean for crypto companies?

Keith Martell and Konstantinos Adamos

 · 03/24/2022  · 03/24/2022

Last month, crypto-lending platform BlockFi agreed to settle with the U.S. Securities and Exchange Commission (SEC) for $100 million. The penalty related to claims BlockFi violated US securities law through a retail lending crypto product.

The penalty is an important development for a number of reasons.

For one, it’s the largest penalty paid by a crypto company to date. The charge also signifies SEC Chairman Gary Gensler’s continued interest in ensuring customer protection for crypto investors in securities products.

Although it can sometimes be hard to reconcile consumer protection with enforcement action and a civil penalty, the basis behind the SEC’s decision is constant - if you offer securities without proper registration and while making false statements, there will be consequences.

Is the SEC against crypto?

Despite the significant steps taken to regulate the industry, crypto trading remains largely unregulated the world over. Investors still have little to no protections available, meaning regulators have to get creative to adapt to this fast changing environment. The BlockFi case is a perfect example.

The basis of the SEC complaint was that BlockFi engaged in offering securities without proper registration or exemption with its BlockFi Interest Account (BIA). The BIA was classified as a security under the Howey and Reves test, as it met all of the requirements set out under both U.S. Supreme Court cases.

It’s debatable whether the 1946 Howey case regarding orange groves is the best way to approach a cutting edge disruptive technology like blockchain. However, there’s no doubt the two tests allowed the SEC to achieve its objectives and ensure consumer protection around securities based crypto-assets.

Any investment carries risk, so retail customers must be fully informed about, and properly understand these risks. Registration requirements ensure companies are transparent around the risks involved in securities offerings by forcing firms to follow strict disclosure requirements.

In addition to the unregistered offering of securities violations, the SEC complaint highlighted that BlockFi made false and misleading statements regarding its collateral practices.

So, what’s next?

It’s too early to call right now. We understand the SEC action was primarily aimed at getting companies to properly register securities products and be forthright around disclosures.

What is clear is the message the SEC has sent to the industry: register your securities products when you need to and be transparent with your customers. Both points are understandable and appropriate.

What are we doing at Revolut?

When it comes to crypto - in fact, when it comes to any investing - we continuously monitor the market for new developments that may affect our customers and the ways we offer our product. We always want to be completely transparent and we put this at the very heart of what we do. It goes to the core of our business, impacting how we design our products and how we communicate with customers about them.

A lot of effort goes into making our terms and conditions as simple to understand as possible and we embed risk warnings and disclosures throughout the customer journey. These alerts and signposts are to make sure that when you make an investment decision you’re fully informed about any risk it carries.