BlockFi Lending, LLC (BlockFi) has agreed to pay $100,000,000 to settle two enforcement actions brought by regulators from several states and the federal government. As the largest SEC fine in a crypto case, it included hundreds of whistleblowers providing information about BlockFi’s misdeeds in violation of U.S. securities laws. A press release from the Securities and Exchange Commission (SEC) details the case, which can be considered a clash between ever-evolving digital innovation and government regulation of the American marketplace.
Consumer Protection Means Transparency for Crypto
Such a clash means big paydays for whistleblowers when a case is successful, like the case against BlockFi. The government aggressively prosecutes cases with alleged violations of United States securities law. Both state and federal prosecutors depend on insiders, known as “whistleblowers,” to tip off the government or provide valuable information on the innerworkings of a company on the government’s regulatory radar. Whistleblowers win big. By providing inside information in cases where sanctions are more than one million dollars, whistleblowers receive between 10% and 30%.
The BlockFi case is a great example. Using original information from whistleblowers living in dozens of states, the SEC went after BlockFi for violations of the 1933 Securities Act, which requires a company to register before offering and selling securities. The government also accused BlockFi of being less than transparent with the public when it came to the company’s investments and the associated level of risk. Finally, because of the nature of its practices, BlockFi was found to be an investment company that failed to register under the Investment Company Act of 1940.
BlockFi BIAs Should Have Been Registered as Securities
With headquarters located in Jersey City, New Jersey, BlockFi offered an attractive product to investors: the BlockFi Interest Account (BIA). From the investor standpoint, one could lend one’s own crypto assets to BlockFi; in return, the company pledged a variable monthly interest payment back to the investor. BlockFi would extend loans to institutional borrowers. This “crypto-lending,” and the level of risk being taken with investors’ assets, ran afoul of securities laws. BlockFi’s website told potential investors that its third-party loans were “typically overcollateralized.” According to the SEC, as much as 70% of BlockFi’s loans were undercollateralized.
Because BlockFi failed to register the offers and sales of BIAs, these transactions were not government regulated. From the government’s standpoint, consumers were put at excessive risk due to lack of regulation. While banks and credit unions are heavily regulated and required to carry adequate insurance to limit risk, companies like BlockFi with products like BIAs pose more risk to the consumer. Thus, the government’s desire to regulate companies and their activities with federal law. The case’s finding that BIAs are securities and that BlockFi is an investment company pulls these under the umbrella of regulation.
Regulation Arena Ripe for Whistleblowers
As is often the case, BlockFi was prosecuted by the SEC in one case and by state regulators from more than 30 states in the other. In both, BlockFi must pay sanctions of $50,000,000. Whistleblowers will receive between 10% and 30% for their crucial roles in the case. BlockFi also must discontinue offering BIAs to U.S. investors. It now offers a new registered crypto-lending offering: BlockFi Yield.
The SEC has received around 1,400 whistleblower submissions in the past three years. The SEC’s Whistleblower Program is a way for the government to combat fraud and violations of securities laws, while offering huge benefits to whistleblowers. These benefits include huge paydays, confidentiality, and certain job protections against job retaliation. For those with inside information related to false claims, fraud or securities law, these benefits provide a huge incentive to come forward. With the right attorney providing the best advice, whistleblowers can win big.