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On February 14, 2022, the SEC entered a settled order against BlockFi Lending LLC (“BlockFi”) for the unregistered offer and sale of its crypto lending product, called BlockFi Interest Accounts (“BIAs”), and making false and misleading statements concerning the level of risk they carried. In a first for a crypto-related enforcement action, the SEC also charged BlockFi with violating the registration provisions of the Investment Company Act of 1940 (“ICA”).

The order found that BlockFi’s BIA qualified as a security under both the Reves test for when notes are securities and the Howey test for an investment contract. Under Reves, a note is presumed to be a security unless it falls into certain judicially-created categories of financial instruments that are not securities, for example, home mortgage notes, or consumer or commercial financing notes, or bears a “family resemblance” to such notes. Among other things, the SEC or a court will look to the motives of a reasonable buyer and seller; whether the note was offered and sold to a broad segment of the public; and whether it was characterized as an investment. Here, the SEC found the BIAs were securities because BlockFi sold them to raise crypto assets for use in its investment activities –to make loans to institutional and retail borrowers, to stake, and to buy crypto asset trust shares and interests in private funds – and investors bought them for the promised returns. BlockFi promoted BIAs as investments and sold them to more than half a million investors, mostly in the U.S. Relevant to the Reves analysis, the SEC found there was no other factor, such as the existence of another regulatory scheme, that reduced the risk of the BIA, rendering application of the federal securities laws unnecessary. The order found the BIA qualified as an investment contract under Howey because BlockFi sold it in exchange for an investment of money on the promise of returns from its lending and investment activities, and pooled investors’ funds to generate returns for both BlockFi and BIA investors. Furthermore, the order found the company’s website falsely stated that the its institutional loans were “typically overcollateralized” when they were not.

Finally, the SEC found BlockFi failed to register as an investment company under the ICA, though it should have done. Specifically, BlockFi held assets meeting the definition of investment securities under the ICA, including loans it made to counterparties, with a value exceeding 40% of its total assets. BlockFi was an issuer. And, it was not registered with the SEC as an investment company, or exempted or excluded from the ICA’s definition of an investment company.

Under the settlement, BlockFi agreed to pay a $50 million penalty to the SEC and an additional $50 million in fines to 32 states to settle similar charges. BlockFi also agreed to stop offering or selling its BIAs in the U.S. and to undertake to come into compliance with the ICA. In connection with the settlement, BlockFi’s parent company announced its intention to register the offer and sale of a new lending product under the Securities Act of 1933.


In announcing the settlement, Gurbir Grewal, Director of the SEC’s Division of Enforcement said, “Crypto lending platforms offering securities like BlockFi’s BIAs should take immediate notice of today’s resolution and come into compliance with the federal securities laws.” At SKrypto, we recommend crypto lending platforms take this opportunity to review how their products and programs compare to BlockFi’s BIA and take corrective action, as appropriate.

Furthermore, although the order noted that BlockFi used crypto it raised from investors in staking transactions, it notably did not rely on those staking transactions in calculating the percentage of assets that qualified as investment securities, under the ICA, or otherwise note whether staking transactions could be securities under the federal securities laws. This question remains unanswered.

Finally, for crypto history buffs, the SEC first applied both Howey and Reves to crypto lending activity in 2013, in its action against the founder of Bitcoin Savings & Trust , a bitcoin-denominated Ponzi scheme that promised investors up to 7% returns per week based on the company’s bitcoin market arbitrage activities.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm or its clients, or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.


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Philip Moustakis | Counsel

A former senior counsel in the SEC’s Division of Enforcement, Philip advises companies and individuals at Seward & Kissel on cryptocurrencies and blockchain technology, SEC enforcement matters, other regulatory investigations, and internal investigations. As a founding member of the SEC’s Cyber Unit, Philip advised the Commission on cryptocurrencies and investigated matters involving initial coin offerings (ICOs), unlawful touting of ICOs, and other violations of the federal securities laws related to cryptocurrencies. Publicly filed enforcement matters Philip spearheaded included the SEC’s first ever Bitcoin-related enforcement action against the operator of Bitcoin Savings & Trust, a Bitcoin-denominated Ponzi scheme, settled proceedings against an operator of a Bitcoin-related social media marketing venture and a popular Bitcoin betting site for the offer and sale of unregistered securities, and settled proceedings against an operator of unregistered cryptocurrency-denominated securities exchanges and broker-dealers.

“The SEC is a principles based regulator, and it will assert its jurisdiction over any securities offering or transaction, as it has done since the onset of the ICO craze, regardless of the technology used to facilitate such an offering.”

Philip’s thoughts on the recent SEC enforcement action against Kik Interactive, Inc. as published in the Crowdfund Insider article “Former SEC Senior Counsel Comments on Kik Ruling: Kik Could Have Benefited From Traditional Capital Markets Lawyer”