Department of Financial Institutions: Joins 31 other state securities regulators and the U.S. Securities and Exchange Commission to settle with digital asset lending platform BlockFi for $100 million
MADISON, Wis. – The Wisconsin Department of Financial Institutions (DFI) today announced that a digital asset financial services company, BlockFi Lending LLC (BlockFi), has agreed to settlement terms to work with the IFD to settle offers and sales of unregistered securities under the form of interest-bearing digital asset deposit accounts called BlockFi Interest Accounts (BIAs) to Wisconsin residents. As of December 31, 2021, BlockFi had 407,030 BIA investors in the United States, of which more than 4,885 were Wisconsin residents.
BlockFi agreed to pay $50 million to the 53 North American Association of Securities Administrators (NASAA) member agencies, of which DFI is a member, and $50 million in US Securities and Exchange Commission (SEC). NASAA’s 53 member agencies will equally share their half of the settlement, with each receiving $943,396.22 after executing the appropriate consent orders. The DFI is one of 32 NASAA member agencies that have already agreed to work with BlockFi to settle, and other jurisdictions are expected to follow.
Beginning in January 2021, a NASAA member agency in a multi-state task force contacted BlockFi and notified that the company may have offered and sold securities that did not comply with state securities laws. In July and September 2021, Alabama, Kentucky, New Jersey, Texas, Vermont, and Washington filed suits against BlockFi regarding its offering and sale of unregistered securities. As alleged in the state securities actions, BlockFi promoted its BIAs with promises of high returns for investors who purchased the loan products. It took control and pooled the digital assets lent by its investors, and exercised full discretion over the pooled digital assets, including how to use the digital assets to generate a return and pay investors the promised interest. According to state actions filed, BlockFi failed to comply with state registration requirements and as a result investors were sold unregistered securities in violation of state law and deprived of essential information and disclosures necessary to understand the potential risks of these loan products.
BlockFi’s agreement to reach a settlement with the DFI comes amid growing concerns over the proliferation of “decentralized” and digital asset-based financial products and services targeting retail investors. Many of these products and services are analogous to traditional financial services offered by banks and brokerage houses, but without any of the regulatory safeguards provided by registered companies and products. For example, registered companies must honestly disclose all known material facts and explain the risks associated with their investments, while the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Securities Investor Protection Corporation insure depositors and investors against certain types of losses. Financial services firms operating in innovative fintech markets may not comply with important laws that protect retail customers, and investors may not have access to the information needed to perform due diligence and make informed decisions. cause.
“State securities regulators recognize the value that new technologies bring to capital markets. Compliance with applicable laws and regulations promotes competitive capital markets and the continued protection of investors,” said Cheryll Olson-Collins, Secretary-designate of DFI. “This action by NASAA member agencies and the SEC sets an example for other companies providing digital asset financial products and services on how to work to comply with state and federal laws.”
Effective immediately, BlockFi will stop offering its BIAs to the public. BlockFi’s parent company, BlockFi Inc., has indicated that it intends to file with state and federal regulators to offer and sell a new product called BlockFi Yield. As part of the settlement terms, BlockFi will stop allowing new investments in existing BIAs until its securities are properly registered. BlockFi may continue to deploy digital assets for existing BIA investors and may continue to pay interest. Between February 14 and the date that BlockFi Inc. securities are registered and qualified or cleared for sale with the states and the SEC, current investors can keep their existing investments with BlockFi and will continue to earn interest by under their original agreement with the company. This measure is designed to protect the interests of existing investors while allowing BlockFi time to come into compliance with state and federal laws.
Businesses that need to register and manage past unregistered activity should contact their state and federal regulatory authorities. FDI’s Securities Division can be contacted by phone at (608) 266-2139 or by email at [email protected].
The DFI wishes to thank its fellow NASAA member agencies, particularly the Multistate Task Force, for its coordinated efforts and the SEC for its collaboration and assistance.