Crypto lending in the US at risk over BlockFi settlement, says SEC’s Peirce

Rick Steves

“Rather than forcing transparency around retail crypto lending products, today’s settlement may stop them from being offered to retail customers in the United States”.

SEC Commissioner Hester Peirce has stated her concerns over yesterday’s settlement with BlockFi.

While stating that a company taking in crypto from a wide range of investors and promising returns could implicate the securities laws in several ways, Ms. Peirce questioned if the the approach the SEC is taking with crypto lending is the best way to protect crypto lending customers. “I do not think it is, so I respectfully dissent.”

BlockFi will pay a total of $100 million, $50 million to the SEC and another $50 million in connection with state settlements for the same conduct.

“While penalties this size are intended to deter bad conduct, here there is no allegation that BlockFi failed to pay its customers the money due them or failed to return the crypto lent to it. BlockFi’s misrepresentations about over-collateralization are serious, but the combined $100 million penalty nevertheless seems disproportionate”.

Challenging path to onboard retail investors

The SEC Commissioner agreed that customers should get the information they need to assess the risks against the rewards and a self-regulatory or government regulatory framework make sense to ensure transparency, but the securities regulatory framework might not suit best for the terms and risks of crypto lending products.

“Applying the securities regulatory framework has consequences, some of which may be unfortunate. Rather than forcing transparency around retail crypto lending products, today’s settlement may stop them from being offered to retail customers in the United States”, said the Commissioner.

“BlockFi will not be allowed to take in any additional crypto from retail investors until the company has registered a new crypto lending product on Form S-1. Getting an S-1 to the point where staff will declare it effective is often a months-long, iterative process. When crypto is at issue, the timeframe is likely to be longer than it would be for more traditional filings.”

Even assuming BlockFi perseveres and prevails in the S-1 registration process, the firm must first leap through another regulatory hoop, the Investment Company Act.

Although BlockFi was fined for operating as an unregistered investment company, the company cannot register as an investment company since it issues debt securities.

It needs an exemption or exclusion from registration as a market intermediary, a rarely used exclusion with a challenging path to prove that it qualifies.

An alternative would be to work with BlockFi under the SEC’s Section 6(c) exemptive authority to craft a bespoke set of conditions that make sense in this context, said the SEC’s official.

Hester Peirce then criticized the SEC’s process which speaks volumes about its integrity as a regulator. “Inviting people to come in and talk to us only to drag them through a difficult, lengthy, unproductive, and labyrinthine regulatory process casts the Commission in a bad light and thus makes us a less effective regulator.”

She concluded by calling the SEC to do better at accomodating innovation as a company that tries to do the right thing should be met across the table by a regulator that tries to get to a sensible result in a reasonable timeframe.

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