Crypto-lending platform BlockFi has agreed to pay $100 million (roughly Rs. 755 crore) to settle ongoing investigations from the US Securities and Exchange Commission (SEC) and multiple state securities regulators. The SEC alleges that crypto lender BlockFi inaccurately described the level of risk its depositors were exposed to, explaining the penalty. This also happens to be the largest-ever penalty against a cryptocurrency firm and the first in which a crypto company was charged with violating the registration provisions of US' Investment Company Act of 1940.
"BlockFi made a material misrepresentation to BIA (BlockFi Interest Account) investors concerning the level of risk in its loan portfolio,” the order signed by SEC Secretary Vanessa Countryman stated. “BlockFi made a statement in multiple website posts that its institutional loans were ‘typically' over-collateralized, when in fact, most institutional loans were not."
BlockFi has issued a press release confirming the SEC penalty, however, it did not admit or deny the SEC's findings.
The SEC findings illuminate one of the key differences between centralised financial offerings and those made through decentralised finance (DeFi) lending platforms, where the positions and terms for each depositor and lender are verifiable on the blockchain they run atop.
BlockFi offers crypto asset interest accounts that enable users to earn far better yields than banks. However, the SEC has declared these interest-earning products as securities because crypto assets are used for lending and generating yields.
BlockFi has also announced that it plans to register a new, regulatory-compliant lending product that would be a first in the crypto industry.
That said, the massive penalty is being viewed as a heavy blow to the DeFi ecosystem, which is largely made up of decentralised lending and borrowing platforms. Speaking to TechCrunch, crypto-asset attorney Max Dilendorf said the SEC has essentially "wiped out" the DeFi lending business model.
He added that any crypto platform wanting to provide interest-bearing accounts would need to essentially become a publicly-traded company. This is in total contrast to DeFi which is largely operated by decentralised autonomous organizations (DAOs). Moving forward, firms that want to take this route will need to file an S-1 statement, which is akin to launching an initial public offering (IPO). This cost-intensive process also requires investors to be accredited.