BlockFi Page Explains Regulatory Position on Interest-Paying Crypto Accounts

This week on New York Attorney General announced that it has asked two crypto firms to suspend their lending programs. In addition, the AG said it has opened an investigation into three other companies. It was all based on the claim that interest earned on crypto loans is considered security. While it was not immediately clear if anyone had complained about these programs, the GA is clearly targeting “unregulated” crypto firms.

BlockFi, one of the most successful crypto service providers that has garnered the backing of a renowned VC battalion, is NOT based in New York but across the river in New Jersey. While BlockFi hasn’t said anything (at least not yet) regarding NYAG actions, it does host a page explaining the regulatory environment for BlockFi Interest Accounts.

Noting that these accounts are not FDIC insured, BlockFi states:

“BlockFi’s BIAs have been the subject of recent activity by securities regulators in New Jersey, Texas, Alabama, Vermont and Kentucky, and we are in active dialogue with them. regulatory authorities. We believe that our products and services are legal and appropriate for participants in the crypto market, and we remain true to our commitment to protect the rights of consumers to earn interest on their crypto assets. We welcome discussions with regulators and believe that proper regulation of this industry is key to its future success. “

All of these regulatory measures began last July with two C&D from New Jersey and Kentucky.

So what’s the catch?

New Jersey says:

“BlockFi allows investors to buy BIAs [BlockFi Interest Accounts] by depositing certain eligible cryptocurrencies into accounts at BlockFi. BlockFi then aggregates these cryptocurrencies to finance its lending operations and proprietary transactions. In return for investing in BIAs, investors are promised an attractive interest rate that is paid monthly in cryptocurrency. BIAs are not protected by the Securities Investor Protection Corporation (the “SIPC”) or insured by the Federal Deposit Insurance Corporation (the “FDIC”). BIAs are subject to additional risk, compared to assets held with SIPC member brokers, or assets held in banks and savings associations, almost all of which are FDIC insured. They are also not registered with the Bureau or any other securities authority, nor exempt from registration. Despite the added risk and lack of guarantees and regulatory oversight, as of March 31, 2021, BlockFi held the equivalent of $ 14.7 billion from the sale of these unregistered securities in violation of securities law.

Kentucky joins similar claims that BlockFi is promoting up to 8.6% annual interest in parked crypto. Kentucky believes these savings accounts also come in the form of securities, in the form of investment contracts.

In July, BlockFi said that while the New Jersey order calls for preventing the creation of all new BIAs, it has no impact on current BIA customers or any of their other products.

“We are fully operational for all of our existing customers around the world, and you will continue to have access to all products, services and assets on BlockFi.”

Both regulatory measures could be characterized as law enforcement regulation.

Meanwhile, savers can park dollars in their local bank and earn a negative real rate of return. Yes, bank deposits are insured, but the increased return provided to crypto investors contains an attractive offer on a risk-adjusted reward basis.

Meanwhile, BlockFi continues to offer BIAs in many jurisdictions.

About Harold Shirley

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