disb

Department of Insurance, Securities and Banking

DISB Joins $100 Million Settlement with Digital Lender BlockFi, Which Sold Unregistered Products in Violation of State Laws

Tuesday, February 15, 2022
Investors may have lacked critical disclosure information on lending risks; DISB expecting nearly $944,000 to support DC consumer protection efforts

 

Washington, DC—Today, the Department of Insurance, Securities and Banking (DISB) announced it is part of a $100 million settlement with digital asset lending platform BlockFi Lending LLC (BlockFi). The settlement is related to the company’s sales of unregistered securities in violation of state law, which deprived investors of critical disclosure information on the potential risks of those lending products. DISB is expected to receive $944,000 out of the settlement with 31 state securities regulators and the U.S. Securities and Exchange Commission (SEC). The money will be used to support consumer protection efforts in the District.

BlockFi will work with DISB and the other settlement parties to settle offers and sales of unregistered securities in the form of interest-bearing digital asset deposit accounts called BlockFi Interest Accounts (BIAs) to investors. BlockFi agreed to pay $50 million to the 53 North American Securities Administrators Association (NASAA) member agencies and $50 million to the SEC. The 53 NASAA member agencies will share equally in the settlement, each receiving $943,396 after executing the appropriate consent orders.

“Securities regulators recognize the value new technology brings to financial markets. Complying with existing laws and regulations promotes competitive capital markets and continued investor protection,” said DISB Commissioner Karima M. Woods. “This action by NASAA member agencies and the SEC sets an example for other firms providing digital asset financial products and services of the importance of complying with securities laws.”

BlockFi’s agreement to enter a settlement with DISB comes amidst rising 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 brokerages, but without any of the regulatory safeguards provided by registered firms and products. For example, registered firms must truthfully disclose all known material facts and explain the risks associated with their investments, while the Federal Deposit Insurance Corporation, National Credit Union Administration, and the Securities Investor Protection Corporation insure depositors and investors against certain kinds of losses. Financial service firms operating in innovative Financial Technology (Fintech) markets may not be complying with important laws that protect retail clients, and investors may not have access to the information necessary to conduct due diligence and make fully informed decisions.

In January 2021, a NASAA member agency in a multistate working group notified BlockFi that it may have offered and sold securities not in compliance with state securities laws. In July and September 2021, Alabama, Kentucky, New Jersey, Texas, Vermont, and Washington filed state securities actions against BlockFi concerning its offer and sale of unregistered securities. Those the state securities actions alleged that BlockFi: (1) promoted its BIAs with promises of high returns for investors who purchased the lending products; (2) took control of and pooled its investors’ loaned digital assets, and exercised sole discretion over the pooled digital assets, including how to use them assets to generate a return and pay investors their promised interest; and (3) failed to comply with state registration requirements and, as a result, investors were sold unregistered securities in violation of state law and deprived of critical information and disclosure necessary to understand the potential risks of these lending products.

As part of the settlement terms, BlockFi will stop offering its BIAs to the public effective immediately. It will cease allowing new investments in the 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 BlockFi Inc.’s securities are registered and qualified or permitted for sale with the states, the District and SEC, current investors may keep their existing investments with BlockFi and will continue to earn interest under their initial agreement with the company. This measure is designed to protect the interests of existing investors while allowing BlockFi time to bring itself into compliance with securities law.

DISB is continuing to consider enforcement actions against firms that fail to comply with District law. Firms that need to register and deal with past unregistered activity should contact DISB and federal regulators. Contact DISB at (202) 727-8000.

DISB would like to thank its fellow NASAA member agencies, especially the multistate working group, for its coordinated efforts and the SEC for their collaboration and assistance.

For additional information on DISB programs and resources, visit disb.dc.gov.

About DISB

The mission of the Department of Insurance, Securities, and Banking (DISB) is three-fold:

(1) cultivate a regulatory environment that protects consumers and attracts and retains financial services firms to the District; (2) empower and educate residents on financial matters; and (3) provide financing for District small businesses.

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