Crypto firm BlockFi to pay record penalty to settle U.S. SEC, state charges

FILE PHOTO: Representations of cryptocurrencies Bitcoin, Ethereum, DogeCoin, Ripple, Litecoin are placed on PC motherboard in this illustration taken

By Chris Prentice

WASHINGTON (Reuters) - A subsidiary of crypto company BlockFi Inc has agreed to pay $100 million to the U.S. Securities and Exchange Commission (SEC) and 32 states to settle charges in connection with a retail crypto lending product the New Jersey company offered to nearly 600,000 investors, regulators said on Monday.

The charges come as U.S. regulators, worried about investor protections and systemic risks, are cracking down on the booming crypto industry. The settlement is also an example of SEC chair Gary Gensler's strategy to force crypto companies to fall in line with existing U.S. securities laws. The agency said it hopes more companies will follow suit.

The penalty includes $50 million for state regulators and $50 million to the SEC, the largest fine the federal watchdog has levied on an issuer of crypto asset securities, it said.

BlockFi Lending LLC broke the rules by offering an interest-bearing lending product without registering it with regulators. The company and its affiliates held about $10.4 billion in assets from investors - nearly 400,000 in the United States - as of Dec. 8, the SEC said.

The North American Securities Administrators Association (NASAA), which coordinated the multi-state probe, alleged BlockFi failed to comply with similar state registration rules. It added that more jurisdictions are expected to join the settlement.

BlockFi, which neither admitted nor denied the SEC's findings, said in a statement the resolution is an example of the firm's "pioneering efforts in securing regulatory clarity for the broader industry and our clients."

As part of the settlement, BlockFi plans to offer an alternative product expected to be the first crypto interest-bearing security registered with the SEC, the company said. The charges are lower than they might have been due to BlockFi's willingness to cooperate, the SEC said.

Adhering to U.S. laws governing company's registration and disclosure is "critical to providing investors with the information and transparency they need to make well-informed investment decisions in the crypto asset space," said Gurbir Grewal, director of the SEC’s enforcement division.

The SEC has heightened its scrutiny of crypto exchanges and lenders under Gensler, who has said wants to bring the digital asset sector within the existing regulatory framework.

Crypto lending products in particular have become an SEC target. In September, Coinbase Global Inc said the agency was threatening to sue if it went ahead with plans to offer a similar product.

Many crypto asset companies say the existing securities regulations are inappropriate and the sector needs fresh rules.

From March 2019 to present, BlockFi offered and sold BlockFi Interest Accounts, or BIAs, that allowed investors to lend crypto assets to BlockFi in exchange for a promise to provide a variable monthly interest payment, the SEC said.

The company failed to register the product with the SEC, in violation of the law. BlockFi also broke rules by failing to register as an investment firm, the SEC said.

BlockFi also understated the risks associated with its lending activities, saying they were "typically" over-collaterized when most were not, the SEC said.

BlockFi has been under review by state regulators in the past year, with New Jersey and several other states ordering the firm to stop selling the interest-earning crypto accounts.

BlockFi will no longer offer the product to new U.S. investors. It will continue to service existing accounts but will not allow customers to add to those investments. It will comply with laws governing investment companies and will register a new product called a BlockFi Yield.

(Reporting by Chris Prentice; Editing by Lisa Shumaker and Michelle Price)