SEC’s New Top Cop: Crypto Lenders Beware



The Securities and Exchange Commission isn’t about to give crypto lending firms a mulligan for what it says are securities law violations.
That announcement, by the SEC’s new enforcement director Gurbir Grewal in an interview published by Reuters on Monday (Feb. 28), comes in the wake of a precedent-setting $100 million settlement agreement by cryptocurrency exchange BlockFi on Feb. 14 over the interest-bearing crypto loan product it offered clients.
Crypto lending programs operated by both centralized crypto firms like BlockFi and many decentralized finance, or DeFi, projects are essentially a form of peer-to-peer lending. In this case, BlockFi customers deposited crypto holdings into interest-bearing accounts that were pitched as an alternative to traditional savings accounts with much higher rates or return.
Those funds are then borrowed by people who put up cryptocurrency as collateral, generally 125% to 150% of the amount borrowed. A sizable percentage of DeFi investing, notably derivatives like futures and options, and yield farming schemes, are financed by these loans.
See also: PYMNTS DeFi Series: What is Yield Farming and Liquidity Mining?
“Our message to them is not, ‘Register your product and we’ll just ignore the billions you have under management in this crypto lending product and your violations of the securities laws,’” Grewal, who joined the SEC this summer, told Reuters.
“Our message is that we’ll view their conduct more favorably if they come in — such as what the remedies will look like, including penalties, and finding a path to complying with the securities laws. That’s the benefit entities get from self-reporting violations and working with us.”
Getting Tougher
Grewal’s comments came after other crypto firms with lending products expressed hopes that an amnesty would be announced, allowing them to come in and register without big penalties.
However, given the size of the BlockFi settlement — the biggest ever in a crypto case — that was never a particularly likely outcome.
BlockFi paid $50 million to the SEC and another $50 million to a group of 32 state regulators that joined the SEC for a product that had $14.7 billion under management (rather that in its own coffers).
This follows a get-tough approach by SEC Chairman Gary Gensler, a former MIT blockchain and cryptocurrency professor who has called crypto the “Wild West” of finance.
Read more: Gensler: SEC Is Coming for Crypto Exchanges
When the settlement was announced SEC Commissioner Hester Peirce — known as “Crypto Mom” in the industry thanks to her long-standing support in regulatory matters — called the penalty “disproportionate” even while agreeing that BlockFi made some “misrepresentations” to clients.
In a dissenting opinion, Peirce said “this is not the best way to protect crypto lending customers,” arguing that “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.”
Related: BlockFi’s $100 Million Settlement With SEC Raises Internal Discussion
She also argued that the harshness of the terms flew in the face of the agency’s oft-repeated suggestion that crypto firms come in and talk to them before offering new products. “To make that invitation meaningful, however, we need to commit to working with these companies to craft sensible, timely, and achievable regulatory paths,” Peirce said.
There’s an argument that the agency did just that in mid-September, when it threatened to sue public cryptocurrency exchange Coinbase if it launched a planned Coinbase Lend product, which it said would have been an illegal, unregistered securities offering.
See also: SEC’s Campaign Against Crypto Lending Grows Beyond Coinbase
While CEO Brian Armstrong was outraged at the time, as the SEC refused to explain its decision or discuss its rationale, based on the size of the settlement by BlockFi it seems the agency may have been doing Coinbase — which has a long history of actively cooperating with regulators — a favor. And Coinbase did inform the SEC of its plans ahead of time.
Something Old, Something New
In some ways, the BlockFi settlement was the continuation of an old pattern begun by the SEC in 2018 and 2019, when it went to war with the initial coin offerings, or ICOs, that had funded the industry for several years. In those cases, they chose a high-profile company with a good reputation, negotiated a fine large enough to send a message, and then told the industry to get in line.
But there were also differences, notably in scale. One of the big initial ICO settlements was with Block.one, which paid a $24 million fine on Sept. 30, 2019. While that sounds large, it’s worth noting that the firm raised more that $4 billion in its ICO, and the settlement did not involve mandatory return of funds and bad-actor disqualification from future securities offerings.
It’s also worth noting that Block.one took a number of steps to legitimately keep U.S. investors from participating in the ICO.
Companies that fought back — most notably messaging service Telegram, which raised $1.7 billion in an ICO for its TON blockchain that the agency felt was designed to skirt registration regulations — were pursued aggressively. Telegram tried to fight in court, but had to give in after it became clear the case would drag on for years while preventing the blockchain from going live. It eventually returned $1.2 billion to investors — who took a huge haircut — and abandoned TON.
Related: Telegram Consents To $18.5M SEC Penalty
The only company that ended up fighting the SEC over ICO registration is Ripple, and its case is fairly unique, in that it had been in business for years when sued on Dec. 22, 2020, and was accused of selling XRP tokens in what amounted to a then-seven-year-long unregistered securities sale.
If Ripple wins a case that its executives — and many others in the crypto industry — feel is an attempt at regulation by litigation, as neither Congress nor the courts have definitively declared that cryptocurrencies are securities, it could deal the SEC’s attempts to clean up and police the crypto industry a serious blow.
Read more: Ripple CEO Confident SEC Lawsuit Moving in Right Direction
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NEW PYMNTS DATA: ACCOUNT OPENING AND LOAN SERVICING IN THE DIGITAL ENVIRONMENT

About: Forty-two percent of U.S. consumers are more likely to open accounts with FIs that make it easy to auto-share their banking details during sign-up. The PYMNTS study Account Opening And Loan Servicing In The Digital Environment, surveyed 2,300 consumers to examine how FIs can leverage open banking to engage customers and create a better account opening experience.



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