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Nj-based Crypto Firm Will Pay SEC, States Unprecedented $100M Penalty

A Jersey City-based cryptocurrency company will pay a record $100 million to settle alleged violations of investor-protection laws, state and federal authorities jointly announced.

BlockFi Lending LLC neither admitted nor denied any wrongdoing when it agreed to the highest fine ever by a cryptocurrency company, authorities said.

BlockFi Lending LLC neither admitted nor denied any wrongdoing when it agreed to the highest fine ever by a cryptocurrency company, authorities said.

Photo Credit: BlockFi.com

BlockFi Lending LLC neither admitted nor denied any wrongdoing when it agreed to the highest fine ever by a cryptocurrency company, Acting New Jersey Attorney General Matthew J. Platkin said on Monday, Feb. 14.

However, it did take a different course than many of its crypto rivals by not fighting the fine.

Of the total, $50 million will be paid to the U.S. Securities and Exchange Commission, and up to $50 million will be divided equally among 32 states, Platkin said.

The share for New Jersey -- which was the first state to challenge BlockFi over the account loans -- is $943,396.22, he said.

Former New Jersey Attorney General Gurbir S. Grewal, who is now the director of the SEC's Division of Enforcement, warned other crypto lenders that operate as BlockFi did to "take immediate notice of today’s resolution and come into compliance with the federal securities laws.”

BlockFi advertised itself as a bank-like platform for crypto users, offering a savings product that allowed clients to accrue interest as high as 9.25% on digital holdings -- way above the average from traditional institutions.

Backed by Silicon Valley investor Peter Thiel, BlockFi has reportedly has reached a private value of $3 billion since its inception five years ago.

It had 407,030 investors in the U.S. by the end of last year and, according to Platkin, had raised at least $14.7 billion worldwide through the sale of unregistered securities. The company used that money to finance its cryptocurrency lending operations and proprietary trading, the attorney general said.

The joint action by state and federal authorities accused BlockFi of failing to register its interest-bearing digital asset deposit accounts with the proper regulators and not obtaining -- or even seeking -- approval to act as a branch or money manager.

The Bureau of Securities issued a summary cease and desist order against BlockFi in July 2021, making it one of the first securities regulators in the country to take action against the company, Platkin said.

“Cryptocurrency-related investments may offer investors something new," he said, "but they must still follow the rules."

The settlement comes amid rising concerns over the proliferation of “decentralized” and digital asset-based financial products and services targeting retail investors. Many of these products and services are similar to traditional financial services offered by banks and brokerages but without the regulatory safeguards provided by registered firms and products.

Registered firms must truthfully disclose all known material facts and explain the risks associated with their investments, Platkin noted. This allows investors the opportunity for due diligence to make fully informed decisions, he said.

Fueled by hype, speculation and fraud, the crypto market has become "like the Wild West," SEC Chairman Gary Gensler said.

BlockFi Chief Executive Zac Prince said the decision was made to concentrate on building its business rather than oppose the action, as some crypto companies have done.

“Our DNA in general has not been where we are trying to fight these questions aggressively,” Prince said in a statement. “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'."

Effective immediately, BlockFi will stop offering its BlockFi Interest Accounts in the U.S. as it looks to register a new product -- BlockFi Yield -- under SEC rules.

Existing customers can move to the new product if they wish. Either way, they'll continue receiving interest on their existing accounts, Platkin said. They simply can't add new assets under the deal, he said.

The goal, Platkin said, is to protect the customers' interests -- no pun intended -- while allowing BlockFi time to comply with state and federal laws.

The state Bureau of Securities "continues to caution investors to look beyond the promise of heightened returns and to carefully consider the risks,” its acting bureau chief, Amy Kopleton, warned Monday.

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