Feds Target BlockFi DeFi Lending Product

Feds Target BlockFi DeFi Lending Product


BlockFi Image: Unsplash / Moguldom

Crypto exchange BlockFi Inc. is being scrutinized by the U.S. Securities and Exchange Commission (SEC) over its popular decentralized finance (DeFi) lending product that lets users deposit Bitcoin and other cryptocurrencies and earn interest on their holdings.

Regulatory actions have been taken against BlockFi in five states — New Jersey, Alabama, Kentucky, Vermont  and Texas — each accusing the firm of selling unregistered securities with its service that lets users earn interest on crypto, and calling for its lending product to be banned.

BlockFi claims it works much like a traditional bank savings account for Bitcoin, Ethereum, and other crypto coins, except with much higher returns than a typical savings account.

It brags that its crypto lending product, BlockFi Interest Account, provides annual yields as high as 9.5 percent, a figure that sounds too good to be true compared to the average 0.06-percent interest rate offered by bank savings accounts in the U.S., according to the FDCI (Federal Deposit Insurance Corporation).

Valued at $4 billion, BlockFi has more than 500,000 retail accounts and is a new kind of financial institution that enables customers to use their cryptocurrency holdings to earn interest, borrow cash against their holdings, and buy or sell their crypto.

Based in New Jersey, BlockFi is one of the largest and best-known entities in the emerging multi-billion-dollar crypto loan industry.

The SEC reviewed the BlockFi lending product focusing on whether it is a security that needs to be registered with the regulator.

“Crypto is a novel assets class and regulators have considerable discretion in deciding where and when to bring enforcement actions,” crypto lawyer Preston Byrne told Vice Media.

If BlockFi is forced to register its interest accounts as a security product, then it might “limit substantially the availability” to U.S. customers, including potential discontinuation in certain U.S. states, according to Byrne.

“Regulators do not seem to understand the dynamics of the crypto market fully, and the actions that they take are likely to discourage at least some consumers from partaking in an emerging and potentially very efficient and innovative investment market,” said Firat Cengiz, senior lecturer in law at the University of Liverpool, in a Cointelegraph interview.

The goal of regulators should be to protect citizens against usual hazards of the crypto market such as financial complexity, fraud, cyber-attacks, without compromising innovation, Cengiz added.

Despite the mounting legal questions, BlockFi is on pace to make $475 million in gross revenue this year, according to Zac Prince, one of the firm’s founders.

On its website, BlockFi says it is in “active dialogue” with regulators from New Jersey, Texas, Alabama, Vermont and Kentucky and its products are “lawful and appropriate” for crypto participants.

While banks and crypto exchanges alike are targeted for securities violations, the fines levied against crypto exchanges are a fraction of those against traditional financial institutions, CoinTelegraph reported.

Listen to GHOGH with Jamarlin Martin | Episode 74: Jamarlin Martin Jamarlin returns for a new season of the GHOGH podcast to discuss Bitcoin, bubbles, and Biden. He talks about the risk factors for Bitcoin as an investment asset including origin risk, speculative market structure, regulatory, and environment. Are broader financial markets in a massive speculative bubble?