The Securities and Exchange Commission is not about to award crypto credit companies a mulligan for what it says are violations of securities law.
The announcement, by new SEC Enforcement Director Gurbir Grewal in an interview published by Reuters on Monday (February 28), follows an unprecedented $100 million settlement deal by the crypto exchange. -BlockFi currency on February 14 on interest-bearing crypto loan product it offered to customers.
Crypto lending programs operated by both centralized crypto companies 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 assets into interest-bearing accounts that were touted as an alternative to traditional savings accounts with much higher rates or yield.
These funds are then borrowed by people who put up cryptocurrencies as collateral, usually 125% to 150% of the amount borrowed. A significant percentage of DeFi investments, including derivatives like futures and options, and yield farming programs, are funded 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 securities laws,'” Grewal, who joined the SEC this summer. .
“Our message is that we will view their conduct more favorably if they come in – like what remedies will look like, including penalties, and find a way to comply with securities laws. This is the benefit entities get by reporting violations themselves and working with us. »
Grewal’s comments came after other crypto companies offering lending products expressed hope that an amnesty would be announced, allowing them to come register without big penalties.
However, given the size of the BlockFi settlement — the largest 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 who joined the SEC for a product that had $14.7 billion under management (rather than in its own coffers). ).
This follows a tough approach by SEC Chairman Gary Gensler, a former MIT blockchain and cryptocurrency professor who 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 longtime regulatory support — called the penalty “disproportionate” even in agreeing that BlockFi had made “misrepresentations” to customers.
In a dissenting opinion, Peirce said that “this is not the best way to protect crypto lending customers,” arguing that “rather than imposing transparency around retail crypto lending products, regulation today could prevent them from being offered to retail customers in the United States. ”
Related: BlockFi’s $100M Settlement With SEC Sparks Internal Discussion
She also argued that the harshness of the terms went against the agency’s oft-repeated suggestion that crypto firms come and talk to them before offering new products. “To make this invitation meaningful, however, we must commit to working with these companies to develop reasonable, timely and achievable regulatory pathways,” Peirce said.
There is 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, according to it, would have been an illegal and unregistered securities offering.
See also: SEC campaign against crypto lending extends beyond Coinbase
While CEO Brian Armstrong was outraged at the time because the SEC refused to explain its decision or discuss its rationale, based on the size of the settlement by BlockFi, it appears the agency may have be done Coinbase – which has a long history of active cooperation with regulators – a favor. And Coinbase notified the SEC of its plans in advance.
Something old, something new
In some ways, the BlockFi settlement was the continuation of an old pattern started 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 these cases, they picked a top company with a good reputation, negotiated a fine big enough to send a message, and then told the industry to get in line.
But there were also differences, especially of scale. One of the major initial ICO settlements involved Block.one, which paid a fine of $24 million on September 30, 2019. While this sounds significant, it should be noted that the company raised over 4 billions of dollars in its ICO, and the settlement made does not involve mandatory return of funds and disqualification of bad actors from future securities offerings.
It should also be noted that Block.one has taken a number of steps to legitimately block US investors from participating in the ICO.
Companies that have fought back — including messaging service Telegram, which raised $1.7 billion in an ICO for its TON blockchain which the agency said was designed to circumvent registration regulations — were aggressively pursued. Telegram tried to fight it out in court, but had to relent after it became clear the case would drag on for years while blocking the blockchain from going live. He eventually returned $1.2 billion to investors – who took a huge haircut – and dumped TON.
Related: Telegram agrees to $18.5 million SEC fine
The only company that ended up fighting the SEC over ICO registration is Ripple, and its case is quite unique, in that it had been in business for years when it was sued on the 22nd December 2020 and was accused of selling XRP tokens in what rose. to an unrecorded securities sale that then lasted seven years.
If Ripple wins a case that its executives – and many others in the crypto industry – see as an attempt to regulate through litigation, because neither Congress nor the courts have definitively declared that cryptocurrencies are securities, it could face the SEC’s attempts to clean up and police the crypto industry a serious blow.
Read more: Ripple CEO Is Confident SEC Lawsuit Goes in the Right Direction
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The SEC’s New Top Cop: Beware Crypto Lenders
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