Powers On… The SEC Takes Reactionary Measures Against Crypto Lending – Coin-Crypto Magazine

It is unfortunate that the United States Securities and Exchange Commission has chosen to send a message to the crypto industry by: hit a huge $100 million settlement from the lending platform BlockFi in an administrative procedure announced publicly on February 14. It was quite a Valentine’s Day kiss — $50 million for the SEC and $50 million for about 32 states that piled up because they saw an easy target.

Enabled… is a monthly opinion column by Marc Powers, who spent much of his 40-year legal career working on complex securities-related cases in the United States after a stint with the SEC. He is now an adjunct professor at Florida International University College of Law, where he teaches a course on Blockchain & the Law.

Don’t get me wrong: I agree with the SEC that as part of its lending business, BlockFi likely offered products that could be characterized as “securities” as defined in the Securities Act of 1933 in Section 2(11). Ordinary CoinTelegraph readers may remember I talked about a similar one lending program planned by Coinbase that would likely be a “security” since the lent assets were all pooled for lending purposes. The SEC’s legal analysis takes a slightly different approach, presenting the lending program as both an “investment contract” and a “note” under Section 2(11). So I’m not surprised that the SEC has filed a lawsuit for that violation of the federal securities law. What is somewhat disturbing, however, is both the size of the fine and the allegation that BlockFi was operating as an unregistered investment company under the Investment Company Act of 1940.

Indeed, I am not the only one experiencing this. SEC Commissioner Hester Peirce publicly disagreed to spend a “Settlement Statement with BlockFi Lending LLC” the same day the SEC lawsuit began. In the statement she asks:

Is the approach we are taking with crypto lending the best way to protect crypto lending customers? I don’t think so, so I respectfully disagree.

Bravo to Commissioner Peirce! Both for her fearless audacity in advocating for a more reasoned regulatory approach to advancing the nascent crypto industry, and because she is currently the only shining beacon the industry can count on to challenge the knee-jerk reactionaries in government. couples – reactionaries who care little about throwing out the proverbial baby with the bathwater.

The US Regulatory Landscape

There was a time when “Crypto Mom” had at least one ally on the committee who, like them, was trying to protect blockchain from over-regulation. Elad Roisman, a fellow Republican appointed by former President Donald Trump, joined Peirce advocating reasonable regulation for the industry. But he resigned from the SEC in January, after serving as a commissioner for just over three years. Peirce was nominated to the SEC by Trump and confirmed in January 2018, so she has one year left of her five-year term. Let’s all hope she gets reappointed by President Joe Biden, because once she leaves the SEC, Chair Gary Gensler’s actions will go unchecked, and we can expect many more efforts from him to, in the name of investor protection, imposing disproportionate measures. “phone book” settlement numbers.

As I have written before, Gensler is a aggressive government regulator, after showing his tenacity in imposing regulations with the Commodity Futures Trading Commission. His deep understanding of blockchain and crypto, as evidenced by the fact that he taught the subject at MIT, is both a blessing and a curse. As chairman of the CFTC, he passed hundreds of rules and regulations to implement Dodd-Frank law, including regulating swap transactions. He has spent most of the past 25 years in and out of the US government, so he has political instincts. His biography shows that he has not worked in the private sector since the mid-1990s.

In SEC press release announcing BlockFi settlement, Gensler . says states

it is [the settlement] further demonstrates the Commission’s willingness to work with crypto platforms to determine how to comply with those laws [the Securities Act and Investment Company Act]†

For real? I don’t believe or accept that for a minute. How does a $100 million fine demonstrate the SEC’s “willingness to work with crypto platforms”? It seems to me that this is a pretty hefty financial penalty.

While I don’t know how this settlement came about, I highly doubt that if and when BlockFi approached the SEC to discuss its compliance efforts, it thought that by voluntarily coming forward and cooperating it would be struck with a settlement. from $100 million! Plus, most startups aren’t in a position to pass that extra change along, and I think this settlement could deter them from collaborating and self-reporting.

The BlockFi Settlement

In this case, BlockFi allegedly offered and sold BlockFi Interest Accounts or BIAs, which allowed investors to lend their crypto assets to the company in exchange for its agreement to provide variable monthly interest payments. According to the administrative Order Instituting Cease-and-Desist Proceedings, Making Findings, and Imposing a Cease-and-Desist Order, BlockFi generated the interest paid to investors by deploying its assets in a variety of ways, including lending crypto assets to institutional and corporate borrowers, who lend US dollars to retail investors, and invest in stocks and futures. As of December 2021, BlockFi and its subsidiaries had approximately $10.4 billion in BIA investor assets and had more than 500,000 BIA investors, including nearly 400,000 in the United States.

Perhaps the SEC justifies this huge settlement amount because BlockFi agreed with findings, without admitting or denying them, that it has made materially false and misleading statements on its website regarding its collateral practices and therefore the risks associated with its lending activities. For this, the company is accused of violating the anti-fraud provisions of the Securities Act, Sections 17(a)(2) and 17(a)(3). But, as Peirce notes in her dissent:

There is no allegation that BlockFi failed to pay its customers the money they owe or return the loaned crypto.

In other words, there was no financial loss to investors from the alleged inaccuracies. Also, like me, she acknowledged that misrepresentations about overcollateralization are serious — it was less than 24% of the time, according to the warrant. But to the commissioner, “The combined $100 million fine nevertheless seems disproportionate.”

One final point about the settlement and the disagreement is noteworthy. The warrant states that BlockFi has agreed to register as an investment company. (I’m leaving if I agree with the SEC’s analysis that the BIA program has made BlockFi an “investment company” for another day.) Still, as Peirce aptly put it, registration “is often a months-long, iterative process.” and “When crypto is at stake, the time frame will likely be longer.”

Until registration is effective, BlockFi has agreed to stop offering loan products to US citizens. There are also other obstacles that the SEC could put forward to deny registration, such as the fact that BlockFi cannot register as an investment company because it issues debt securities, so an exemption from registration will likely be required. I wonder if BlockFi or its counsel actually figured out a successful path to ever offering BIAs to US citizens again before settling in.

According to Peirce, “The investor protection objective of the current settlement will be badly served if retail investors are ultimately barred from participating in these products. Second, our process speaks volumes about our 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 puts the Commission in a bad light and thus makes us a less effective regulator. […] In the interest of the American public, our own reputation, and the companies that heed our call to come in and talk to us, we need to do better than we’ve done so far to enable innovation.” Listen you with me, Gensler?

Marc Powers is currently an adjunct professor at Florida International University College of Law, where he teaches “Blockchain & the Law” and “Fintech Law.” He recently retired from an Am Law 100 law firm, where he built both the national securities dispute resolution team and regulatory enforcement as well as practice in the hedge fund industry. Marc began his legal career in the SEC’s Enforcement Division. During his 40 years as a lawyer, he was involved in, among others, the Bernie Madoff Ponzi scheme, a recent presidential pardon and the insider trading trial of Martha Stewart.

The views expressed are those of the author only and do not necessarily reflect the views of Coin-Crypto or Florida International University College of Law or its affiliates. This article is for general information purposes only and is not intended and should not be construed as legal or investment advice.

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