A subsidiary of crypto company BlockFi Inc has agreed to pay $100 million to the U.S. Securities and Exchange Commission (SEC) and 32 states to settle charges in connection with a retail crypto lending product the New Jersey company offered to nearly 600,000 investors, the SEC said on Monday.
The penalty includes $50 million to the state regulators and $50 million to the SEC, the largest ever fine the federal securities watchdog has levied on an issuer of crypto asset securities, it said.
BlockFi Lending LLC, the subsidiary, broke the rules by offering an interest-bearing lending product without registering with the SEC, the agency said.
BlockFi, which neither admitted nor denied the SEC's findings, has agreed to comply by offering an alternative product that will be registered with the SEC. The charges are lower than they might have been due to BlockFi's willingness to cooperate, the SEC said.
The charges come as U.S. regulators, worried about investor protections and systemic risks, are cracking down on the booming crypto industry by forcing companies in the space to comply with existing U.S. securities laws.
The SEC has heightened its scrutiny of crypto exchanges and lenders under Chair Gary Gensler, who has said wants to bring the digital asset sector within the existing regulatory framework. Crypto asset companies, meanwhile, say the existing rules are inappropriate.
From March 2019 to present, the firm offered and sold so-called BlockFi Interest Accounts, or BIAs, that allowed investors to lend crypto assets to BlockFi in exchange for a promise to provide a variable monthly interest payment, the SEC said.
The offering was a violation of securities laws because the company failed to register it with the SEC. BlockFi also broke rules by failing to register as an investment firm, the SEC said.
The firm also understated the risks associated with its lending activities by making false or misleading statements for more than two years that they were typically over-collaterized when the majority were not, the SEC said.
BlockFi will no longer offer the product to new investors in the United States. It will continue to service existing accounts but will not allow customers to add to those investments. It will comply with laws governing investment companies and will register a new product called a BlockFi yield.
Crypto lending products in particular have become an SEC target. In September, Coinbase Global Inc said the agency was threatening to sue if it went ahead with plans to offer a similar product.
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