WASHINGTON—A cryptocurrency company that allowed nearly 600,000 users to earn interest by lending their holdings to other traders will pay $100 million to settle claims that its product violated investor-protection laws.
BlockFi Lending LLC, which held as much as $14.7 billion in assets at its peak last year, will pay the highest fine ever agreed to by a cryptocurrency company, Securities and Exchange Commission officials said. The settlement is the first enforcement action targeting a crypto lending platform, according to the SEC. The company neither admitted nor denied wrongdoing.
BlockFi and its competitors amassed customers in recent years as crypto traders discovered they could reap yields much higher than interest rates paid by most banks or bond issuers. The company didn’t seek approval to act as a bank or money manager, and its interest-bearing accounts weren’t registered with federal bank or securities regulators.
BlockFi will stop offering the accounts in the U.S. and will seek to register a new product, BlockFi Yield, under SEC rules.
That will require BlockFi to file a public registration statement that spells out how BlockFi Yield works as well as the risks associated with investing in it. The SEC will review the disclosure before the product can be sold, and if it signs off, the company will be able to sell the new product in the U.S.
SEC Chairman Gary Gensler argues that much crypto-market activity should be overseen by federal securities regulators. Currently, he has said, it is a “Wild West” involving a lot of hype, speculation and fraud.
The SEC previously warned Coinbase Global Inc. that it would sue the company if it launched a lending product it had advertised. Coinbase Chief Executive Brian Armstrong accused the SEC of trying to intimidate his company and of not showing why it had jurisdiction. Coinbase eventually decided against offering the product.
Some crypto companies have opted to fight the SEC in court over its enforcement claims. But BlockFi Chief Executive Zac Prince said it was better to resolve the investigation and focus on building its business, even if rivals take a different position.
“Our DNA in general has not been where we are trying to fight these questions aggressively,” Mr. Prince said on Monday. “Our DNA is more, ‘let’s find the right path within whatever existing frameworks we need to facilitate the products and services that add value to our clients.’”
The bitcoin or other cryptocurrencies that people deposited with BlockFi were lent to institutional customers that needed the coins to trade. Those entities paid interest to BlockFi, which shared some of that revenue with the holders of the interest accounts.
The SEC also accused BlockFi of misleading users by playing down the risk of its lending practices. The company said on a website that institutional borrowers typically posted an amount of collateral that was greater than their loan, which would protect lenders against potential defaults. The SEC said the statement wasn’t true.
BlockFi will pay half of the $100 million penalty to 32 states, some of which accused the company last year of violating rules and told it to stop doing business in their state. New Jersey was the first state to issue a cease-and-desist order to BlockFi over the loan accounts.
Write to Dave Michaels at [email protected]
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