One of the highest fines ever imposed in the crypto world. Not only that, but BlockFi has a corporate restriction that prevents it from signing up new clients in the United States. And, with BlockFi facing the firing squad, this raises the question.
Will we lose our ability to earn that sweet juicy interest on stable coins, which is one of my favorite aspects of cryptocurrency? According to BlockFi, everything should be OK with their soon-to-be-released yield product. Is this, however, entirely accurate?
I needed to take the time to conduct my own research. So, here’s what happened. BlockFi agreed to pay a fine of $100 million for breaking securities regulations. Crypto lending, on the other hand, is becoming increasingly popular.
I mean, every major exchange offers APR that beats any traditional savings account into submission. For the longest time, it’s almost felt too good to be true. Why would I keep my money in the bank if I can earn 8% to 15% elsewhere?
According to the SEC and this 90-year-old document, that might be the case – Too good to be true. Could the SEC be right here?
On the one hand, it’s no secret that there are countless crypto scams that a little regulation could be pretty helpful. On the other hand, is this 90-year-old document the best pamphlet to follow?
We’ll get to all this shortly because here’s what the chair of the SEC had to say. ” Today’s settlement makes clear that crypto markets must comply with time-tested securities laws.” Well, they have an idea.
So, what does BlockFi intend to do all about this? It’s called BlockFi Yield, which is a new crypto interest-bearing security aiming to be available and legal, importantly, legal for US clients.
We’ll break that down further in a second. But first, I have a more pressing question. What happens to current investors? I mean, I have a BlockFi interest account with a good chunk of money in it. Will I stop earning interest? Do I need to worry? What about my BlockFi credit card or my wallet?
How This Affects You
If you’re in the US, you can continue receiving interest on existing holdings, but unfortunately, you can’t add any new assets into your account. This only affects the BlockFi interest account program, so the BlockFi wallet and credit cards will still be good to go.
It’s also important to note that while you can’t make any new deposits, you can still withdraw your funds at any time if you choose to.
BlockFi claims that this is an overall win and seems optimistic, even though this new interest account product will make it harder for them to do regular business as they will now be subject to quarterly reporting.
However, in the FinePrint, BlockFi themselves has stated that they’ve yet to file with the SEC, and there can’t be any assurance just yet that their filing will be successful.
So where does this leave us?
They’re both confident but unsure. Sounds a lot like me when I was single, but it seems like this is what likely happened.
They have a compliance officer or a team of them that are nearly certain that they can get their yield product approved, but their lawyers have to say we can’t guarantee it for now, at least for the time being.
Either way, until then, if you want to earn interest on cryptos, you need to find another alternative to survive, if you don’t already have an account there. If you’re familiar with DeFi, you can go to the Anchor protocol and lend out some money there.
Technology and Controversy
The reality is, when something revolutionary is invented, there’s always some kind of controversy. And when it comes to new technology in money, regulations can be extremely slow to catch on. All this BlockFi news made me think of the story of credit cards.
The first general-purpose credit card was called the Diners Club Card. This thing was revolutionary, but it had some major limitations. Mainly that the card allowed members to charge the cost of restaurant bills. And that’s it. That’s all.
Plus, you better hope that it didn’t rain with this thing in your pocket, because it was made out of cardboard. And not only that, each vendor had their own card, so they are shoving your wallet full of cardboard, crossing your fingers that it doesn’t rain.
Then there was an update. Not without its own issues as well. This was a bank of America’s Bank Americard. Creative name, I know, but this thing was revolutionary. A single card that could be licensed to any local bank, which meant no more carrying around those construction paper gift cards.
But profit for Bank of America didn’t come easy. By late 1959, 22% of accounts were fraudulent. Plus, Bank of America lost a total of $8 million just during the launch, which is about $70 million in today’s money. Not enough to file bankruptcy, but close to what BlockFi is having to pay in fees for their recent fines.
And even that wasn’t the last issue for Bank Americard, because someone in their marketing think tank convinced them to mail out 65,000 preapproved credit cards to residents in Fresno, California, not applications, actual working credit cards. This is called a credit card drop, and it was eventually made illegal in the 1970s.
The reason this made me think of BlockFi is that they basically said, you know what? Screw it. We’re going to allow users to lend out crypto, and eventually, regulations will come, and we’ll deal with it then.
And the SEC said, Well, here are those regulations that you ordered if you’re going to let users earn interest, you need to provide exact information on how you’re generating enough money to pay the interest, and you better be totally transparent about it.
This is important because BlockFi earns part of its money by lending to institutions, and then you, the user get some of the profit in the form of interest, a totally reasonable request by the SEC. But this hasn’t been done before, so it’s complicated.
And this is why BlockFi has to file as a security product and to be approved to continue on with new users. The application that BlockFi will be submitting is called an S-1 filing, and upon approval, this would theoretically allow that new product called BlockFi Yield.
Now, if BlockFi succeeds in getting their S-1 registration, they’ll then have to leap through another regulatory hoop. The Investment Company Act.
See, the Commissioner of the SEC highlights that the deadline of 60 to 90 days is highly ambitious. And there’s another problem here. They’re not sure that the settlement will do anything good for the ordinary investor.
They said, rather than forcing transparency around retail crypto lending products, today’s settlement may stop them from being offered to retail customers in the United States. This would be bad because it could result in a product that’s either only available to large institutions or accredited investors.
Bad because the whole point of crypto lending is to serve the little guy offers a chance to actually make money, on our money that isn’t a 10th of a percent that banks give us. This is the fight, financial opportunity for everyone.
And this leads to the fundamental question of whether crypto lending, in general, should be considered a security and thus regulated more closely.
The Future of Crypto Lending
To help determine this, we need to look at the Howey test, and here’s the easiest way I’ve seen to visualize it. Picture four pillars. An investment needs to hit all four criteria to be considered a security and needs more regulation from the SEC.
First, it has to be an investment of money. Second, an expectation of profit, a common enterprise derived from the efforts of a promoter or third party.
So let’s imagine that we’re a lawyer arguing the case that crypto lending isn’t a security. We would need to knock down at least one of these pillars thinking of exceptions to the rules.
So number one, an investment of money. An exception here would be gifts or credits. Think airline miles or crypto airdrops. This doesn’t work for lending because we’re obviously investing money.
Okay, moving our lowering to the next pillar, the expectation of profits. The exception here would be buying any regular product or service, kind of like Patreon.
But this also doesn’t work for crypto lending, because, of course, we’re expecting a profit. That’s why we make a deposit into a platform like BlockFi in the first place.
All right, next pillar, common enterprise. Basically, you need to be able to argue that you, the investor, are not rising and falling with the company. That you’re effectively investing in a company’s stock is a perfect example of profiting with a common enterprise.
If the company does well, you, as a shareholder, do well. That’s why stocks are securities. Exceptions here would be things like collectibles NFTs, baseball cards, Beanie babies, You get the picture. You can make money off of a beanie baby without the company necessarily profiting.
This is where there’s a little bit of wiggle room to argue like a lawyer for crypto lending. But it’s not totally clear again because these rules are decades old.
And then finally, the last pillar, the efforts of a third party to earn you profit. Easy exceptions to this would be commodities like beans, wheat, or even Bitcoin and Ethereum. This is another one with a bit of gray area.
If BlockFi is lending out money to big institutions in order to make the largest amount of money possible and then to pay us with that money, It’s tough to argue that this isn’t a security.
However, if we’re lending crypto on a free market peer-to-peer, kind of like how Kucoin works, Then there’s possibly even more wiggle room here to argue that this isn’t a security. This may also mean that DeFi lending with a smart contract Isn’t security.
So as we can see, this is complicated. The best outcome would be for highly educated people to develop better guidelines specifically for crypto instead of using outdated rules. So there are a lot of unknowns at this point. But what we do know is that crypto lending is extremely important.
In my opinion, this is one of the greatest things to ever happen to the average investor. As far as BlockFi goes, sure, they could have asked for more permission ahead of time, but take a look at Coinbase.
The SEC just outright stopped them, so I had to kind of commend BlockFi in a way for taking charge and just paying the fines. Of course, this doesn’t take away from the fact that they should have been more clear exactly in the risks that investors take by lending on their platform.
But that seems to be in the works. The biggest saving grace here is if lending on platforms like BlockFi gets outlawed altogether, then we still have DeFi lending to use and benefit from. So this is a story to absolutely keep your eyes on.