Is Interest Paid on Crypto Holdings an SEC Violation?
New Jersey Issues Cease and Desist Order on Crypto Interest Payments
The cryptocurrency platform BlockFi Inc. was ordered by the state of New Jersey to stop providing customers with interest-bearing accounts (July 20). The cease and desist order from New Jersey's Bureau of Securities said BlockFi's accounts were not registered with that office and are not exempt from registration; therefore, their sale violated New Jersey securities laws.
The crypto service provider has been offering their BlockFi Interest Account (BIA) to add value by advertising above average (U.S. Dollar) yields to crypto investors who store their crypto assets at BlockFi. Customers can deposit crypto and earn monthly compounding interest.
Cease and Desist:
The company had been offering interest rates between 0.25% and 8.5% depending on the crypto asset and deposit size, in addition to a trading platform and bitcoin rewards credit cards. In comparison, according to the FDIC the national average for interest in savings accounts is 0.06%, while 10-year treasury notes yield 1.19%. They (BIAs) behave similarly to a money market sweep account at traditional brokers. The interest-bearing accounts do not have oversight by regulators such as a bank would with the FDIC and a registered money fund would with the SEC.
New Jersey’s acting Attorney General, said the enforcement against the Jersey City, NJ headquartered BlockFi comes amid concern about the growth of decentralized finance platforms for investors in digital assets. According to the order, investors can “buy” BlockFi Interest Accounts by depositing cryptocurrencies such as Bitcoin and Ethereum with the company, these assets are used to fund lending operations and proprietary trading. “Our rules are simple: if you sell securities in New Jersey, you need to comply with New Jersey's securities laws," Bruck said in a statement. "No one gets a free pass simply because they're operating in the fast-evolving cryptocurrency market."
The order takes effect on July 22 and does not affect existing BlockFi Interest Accounts. Bruck said BlockFi does not offer the accounts in New York and some other jurisdictions.
The Company Position
BlockFi said in a statement it disagreed with the order because the accounts are not securities. It also said it remained fully operational for existing New Jersey clients, and believed its products are "lawful and appropriate for crypto market participants."
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