Securities and Exchange Commissioner Hester Peirce pushed back against the agency’s $100 million settlement with BlockFi Lending on Monday, telling Barron’s the agreement was “not constructive” as a means of regulating the industry.
Chairman Gary Gensler, the Democratic head of the SEC, highlighted the settlement with BlockFi as a sign of progress in regulating crypto lenders.
“Today’s settlement makes clear that crypto markets must comply with time-tested securities laws, such as the Securities Act of 1933 and the Investment Company Act of 1940,” Gensler said in a statement.
“It further demonstrates the Commission’s willingness to work with crypto platforms to determine how they can come into compliance with those laws.”
The agreement resolves charges by the SEC and 32 states alleging that the Jersey City, N.J.-based firm failed to register its BlockFi Interest Account lending product as a security, and misrepresented the product’s risks.
In settling the case, BlockFi didn’t admit to the regulators’ allegations. It will halt U.S. sales of the product and introduce a new one that complies with securities laws.
The deal may hardly look inviting to crypto lenders as a new regulatory template, according to Peirce, the SEC’s lone Republican commissioner and a longtime crypto proponent. She voted against the settlement and issued a statement in dissent.
“We’re taking an approach that’s not constructive to figuring out how we can look at these new products and achieve investor protection goals, while not precluding people from participating in products and services they’re interested in,” Peirce said in an interview.
“The SEC has been loath to try to accommodate the new technology in a way that meets its investor protection mandate but also allows things to move forward,” she said. “That’s been a perennial problem at the SEC and it’s likely to be a problem in crypto lending as well.”
BlockFi said on Monday that it will seek regulatory approvals for its retail lending product. But the SEC laid out a tough legal path for the company, Peirce said. BlockFi may have to register as an investment company—an arduous path for a firm issuing a debt security.
If it doesn’t try and register, BlockFi would need to win an exemption or exclusion from the SEC, but that could also prove quite challenging, given the SEC’s “heightened scrutiny for crypto companies,” Peirce said in her dissent.
Asked if the BlockFi deal would have a chilling effect on crypto lending, Peirce said “we’ll see how people react.” The SEC raised issues around investor protections, she said. “Let’s work constructively on what’s next. That’s what I’d like to see us doing.”
Crypto lending has taken off, with companies like BlockFi racking up billions of dollars in deposits and loans. Other major players in the industry include Celsius Network, Abra, and Genesis. The latter is an institutional lender.
Crypto lenders have also faced state regulatory actions, including cease-and-desist orders in New Jersey and Kentucky.
BlockFi CEO Zac Prince said on Twitter that “we’ve reached a resolution with both the SEC and state regulators that identifies a clear path forward for folks to earn interest on their crypto.” Existing clients will continue to earn interest, and the company’s other products, including its digital wallet, credit card, and institutional offerings aren’t affected, he added.
The settlement, BlockFi said, provides the “increased regulatory clarity we’ve been hoping for.” But BlockFi will now have to meet the SEC’s requirements to keep offering its products to retail investors. At least one official, Commissioner Peirce, doesn’t appear to view that as an easy victory for the firm to achieve.
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