BlockFi’s $100 million settlement indicates the SEC could succeed in enforcement actions against … [+]
The US Securities Exchange Commission’s enforcement action against BlockFi this week was great news for the hundreds of whistleblowers who have filed claims of fraud and wrongdoing in the cryptocurrency industry.
For the first time, the SEC settled a case that alleged a crypto lending platform violated securities laws by failing to register the offers and sales of its retail crypto product.
BlockFi agreed to pay a total of $100 million to settle the case, which is the largest SEC settlement ever paid by a cryptocurrency company. The crypto lending and trading platform also agreed to cease offering or selling BlockFi Interest Accounts (BIAs) in the US.
The SEC said that BIAs are securities as defined in current law, and therefore, the company was required to register its offers and sales of BIAs. BlockFi, however, had failed to do so.
The SEC also said that BlockFi violated the law by operating for more than 18 months as an unregistered investment company, since it issued securities and held more than 40 percent of its total assets, excluding cash, in investment securities. Those investment securities, the SEC said, included loans of crypto assets to institutional borrowers.
According to the SEC, BlockFi also misrepresented the level of risk in its loan portfolio and lending activity.
“Adherence to our registration and disclosure requirements 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 S. Grewal, director of the SEC’s Division of Enforcement, in a statement about the settlement.
In recent years, the SEC has been flooded with whistleblower information concerning violations of securities laws by players in the crypto industry. In just the past three years, the SEC has received more than 1,400 whistleblower submissions concerning cryptocurrencies, reporting fraudulent or unregistered offerings, price manipulation, lax internal controls and other violations. The BlockFi settlement tells those whistleblowers that the SEC is willing to pursue crypto cases and can be hugely successful doing so.
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Whistleblowers have turned to the SEC in droves to report securities law violations because the SEC whistleblower program offers confidentiality, certain protections against job retaliation and significant rewards.
In fiscal year 2019, the first year the SEC started keeping statistics on whistleblower submissions related to cryptocurrency violations of securities laws, the agency reported it received 289 whistleblower submissions involving cryptocurrencies.
That number increased to 345 in FY 2020, then more than doubled last year to 762 submissions.
The big jump in whistleblower submissions likely was due to three factors: the SEC’s aggressive stance on enforcement in the crypto industry espoused by the new SEC chair, Gary Gensler; the tremendous growth of crypto markets; and record-setting whistleblower awards, which have encouraged many whistleblowers to step forward.
SEC whistleblowers are entitled to receive 10% to 30% of the monetary sanctions the agency collects from an enforcement action based on a whistleblower’s information and assistance.
In October 2020, the SEC awarded its largest whistleblower reward so far: $114 million. The Commodity Futures Trading Commission, which has a similar whistleblower program, topped that 12 months later, issuing a $200 million whistleblower award, which is the largest whistleblower award ever made.
Since the SEC keeps whistleblowers’ identities confidential, it is not publicly known whether a whistleblower was involved in the BlockFi case. However, SEC officials have said that a significant percentage of all of its enforcement actions are due to whistleblowers.
Crypto-lending, in particular, seems to be a major focus of SEC enforcement in the crypto industry currently. Coinbase had plans to launch a stablecoin called US Coin that allows holders to lend it to other traders and earn interest, but last September it decided against doing so after the SEC threatened to sue the company if it offered a stablecoin without following securities laws for registering investment offerings.
“To the extent that something is a security, the SEC has a lot of authority,” Gensler said last year in an interview. “And a lot of crypto tokens — I won’t call them cryptocurrencies for this moment — are indeed securities.”
BlockFi is just the first of what is likely to be a series of SEC enforcement actions against crypto lending platforms. Meanwhile, the SEC and the Commodity Futures Trading Commission, bolstered by whistleblowers, are gearing up for a broader crackdown on the crypto industry to tame a market that Gensler refers to as the “Wild West.”
