BlockFi has once again found itself in dire straits just days after getting slapped with a cease and desist order from the state of New Jersey
BlockFi seems to be facing a knock-on effect in other states after New Jersey’s decision to pursue it over allegations of illegally selling unregistered securities in the state. Last week, New Jersey ordered BlockFi to stop offering BlockFi Interest Accounts (BIAs) to any new customers as they violated the state’s securities laws. Since the announcement, Texas and Alabama have joined in and placed similar restrictions on BlockFi’s operations.
A subsequent posting on BlockFi’s website revealed that the state of Vermont had also raised concerns about the BIA accounts, with the crypto company not divulging more on the matter. BlockFi’s home state of New Jersey set the wheel in motion on Tuesday when the state’s Bureau of Securities demanded that BlockFi halt new client sign-ups for its BIA offerings.
Two days later, the Texas State Securities Board filed for a cease and desist order against BlockFi, with a court hearing on the order set for 13 October. The state confirmed that it was acting based on BlockFi’s sale of unregistered securities in the form of interest-bearing crypto accounts and the consequent use of the accrued funds to power its lending activities.
The Alabama Securities Commission also slapped BlockFi with a Show Cause Order, to which the firm is required to respond within 30 days. Otherwise, it will receive another order to halt operations, this time from Alabama. Experts have since observed something unusual on the matter as it involves both sides of the US political landscape. Texas and Alabama are Republican-dominated while New Jersey is typically a Democrat state.
A response acknowledging the New Jersey order by BlockFi’s CEO Zac Prince confirmed that none of the existing clients would be affected, and the company’s BIA services would still be available to them. Prince also insisted that BlockFi would carry on working with the relevant authorities to continue serving their clients. Andrew Bruck, New Jersey’s Acting Attorney General, noted that BlockFi did not offer BlockFi Interest Accounts in other states such as New York, which he explained could be the case because of the laws in place in those states.
BlockFi has maintained its stance, rejecting the view that the BIA accounts can be classified as securities. The firm has also promised to provide updates on regulatory developments to its users. Observers in the crypto space have raised concerns that the states could be working against BlockFi due to its relatively friendly interest rates. In particular, the rates have outdone the traditional offers by textbook banking institutions.
New Jersey, Texas, and Alabama have individual state regulators issuing concerns that New Jersey-based DeFi firm, BlockFi, is offering unregistered securities. Regulators seem to particularly point to BlockFi’s Interest Account (BIA), which offers rates that consumers are now becoming accustomed to in DeFi – but that have blown traditional banking rates out of the water.
The ‘Unusual Three’
Crypto in it’s relatively early emergence in discussions around regulation and broader adoption, has largely been considered a somewhat bipartisan topic. Which makes the three states going after BlockFi a particularly unusual trio. New Jersey, the company’s home state and traditionally a very Democratic-run state at that, is arguably the most aggressive of the three states making claims against the firm. New Jersey has ordered BlockFi to stop offering it’s BIA product to state residents by July 29 according to a recent cease and desist from the state’s Bureau of Securities.
Texas, a traditionally Republican-led state, has also issued a cease and desist with a hearing date currently set for October. The document also cites BIAs as a concern, stating that BlockFi “is, in part, illegally funding its lending operations and proprietary trading through the sale of unregistered securities in the form of cryptocurrency interest-earning accounts.”
Finally, we have another typically Republican-led state in Alabama issuing a ‘Show Cause Order‘ to BlockFi this past week. The company now has less than 30 days to show the state securities commission why they should not be issued a cease and desist for selling unregistered securities. The show cause document suggests that BIAs should be registered with applicable securities regulators.
It’s becoming pretty clear, at least in the case of BlockFi recently, that regulatory hurdles do not live on any particular side of the political aisle.
Bitcoin's can be deposited into BlockFi's BIA product to yield substantial interest-bearing returns. | Source: BTC-USD on TradingView.com
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Is DeFi In Trouble?
BlockFi issued a recent responding statement in a tweet that stated that the firm wholeheartedly believed that it’s BIAs were “lawful and appropriate for crypto market participants”, adding that the company welcomes “discussions with regulators and believe(s) that appropriate regulation of this industry is key to its future success.”
It’s difficult to say the impacts in such an early stage of aggressive regulatory attacks on DeFi, particularly given that of the major players in the yield-generating space, only BlockFi is being highlighted here. Will other states join these three, and will major BlockFi competitors start facing challenges as well? Or are these state regulators simply cracking a proverbial whip – or are there enough substantial differences in how BlockFi competitors, such as Nexo or Celsius, are funding their interest-bearing accounts that leave them absorbing less regulatory risk? Either way, it is becoming abundantly clear that crypto’s relatively quick mainstream success, paired with slow-moving federal decision making, will leave emerging firms – but hopefully not forward-thinking consumers – with some inherent challenges.
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Featured image from Pixabay, Charts from TradingView.com
BlockFi’s CEO Zac Prince confirmed earlier this week that the firm had received a cease and desist order from the New Jersey Bureau of Securities
According to BlockFi chief executive Zac Prince, the New Jersey Bureau of Securities (NJBoS) has demanded that the crypto lending firm stop offering interest-bearing crypto accounts to new customers. The New Jersey-based company has been offering the BlockFi Interest Account (BIA) since 2019. Prince has since revealed that the order did not affect any existing clients, and as such, all aspects of the BlockFi portfolio would remain accessible to those clients.
“We remain fully operational for our existing clients in New Jersey. All aspects of the BlockFi platform continue to be accessible to our clients in New Jersey. The order calls for BlockFi to stop accepting new BIA clients residing in New Jersey beginning July 22, 2021,” Prince disclosed.
He also reaffirmed that BlockFi remained committed to working with authorities to discuss their available products, which he labelled as being compliant and appropriate. He went ahead to clarify that the NJBoS’s assumption that BIA was a security was inaccurate, insisting that the company will continue protecting clients’ interests.
New Jersey acting Attorney General Andrew Bruck explained that the order was a result of selling unregistered securities, which violates New Jersey’s securities laws. He reiterated that the state had been keenly monitoring the crypto sector to ensure compliance with investor law, cautioning that no party was exempt from the law.
“No one gets a free pass simply because they’re operating in the fast-evolving cryptocurrency market.”
Bruck also noted that BlockFi did not offer the said crypto interest accounts in other states such as New York, which he suggested might be due to the laws in place in those states. Following the announcement, Kaitlin Caruso, the acting director in the Division of Consumer Affairs, observed that DeFi products carried significant risk levels even higher than the risk resulting from crypto’s volatility. She warned that even though institutions such as BlockFi seemed to match traditional financial platforms, they left investors exposed and vulnerable.
New Jersey’s order did not sit well with users, who insist that BlockFi did not offer securities via their interest-bearing accounts. Some argued that New Jersey’s decision might have been one to protect the banks. After New Jersey rocked the BlockFi boat, the Alabama Securities Commission followed suit. Yesterday, the commission ordered that BlockFi ‘shows cause’, or else risk a ban of operation for offering unregistered securities.