Five States Take Regulatory Action to Prevent BlockFi From Offering Unregistered Digital Asset Securities
Published on 05 Aug 2021
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USA (National/Federal)
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by Practical Law Finance
PRACTICAL LAW
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05 Aug 2021
The New Jersey Bureau of Securities issued a cease-and-desist order to prevent BlockFi, a financial services company, from selling unregistered digital asset securities. Regulators in four other states have followed suit and accused BlockFi of offering unregistered securities.
On July 19, 2021, the New Jersey Bureau of Securities (NJ BOS) issued a cease-and-desist order to prevent BlockFi, Inc., BlockFi Lending, LLC, and BlockFi Trading, LLC (collectively, BlockFi), a financial services company based in New Jersey, from selling unregistered digital asset securities. BlockFi is a financial services company that generates revenue through cryptocurrency trading, lending, and borrowing, as well as engaging in propriety trading.
According to the order, BlockFi has been funding its lending operations and proprietary trading through the sale of unregistered securities in the form of cryptocurrency interest-earning accounts called BlockFi Interest Accounts (BIAs). According to the order, although BIAs qualify as securities under N.J.S.A. 49:3-49(m), they are neither registered with any federal or state securities regulators, and not exempt from registration. The cease-and-desist order mandates that BlockFi and anyone under its control cease and desist from:
Offering for sale any security, including any BIA, to or from New Jersey unless the security is registered with NJ BOS, is a covered security (as defined under Securities Act of 1933), or is exempt from registration.
Violating any other rules and provisions of New Jersey law regarding the sale of securities in New Jersey.
The order was originally scheduled to go into effect on July 22, 2021, however, NJ BOS issued an extension postponing the effective date of the order to September 2, 2021.
Regulators in four other states have followed suit and:
On July 21, 2021, the Alabama Securities Commission (ASC) announced that it issued a show cause order to BlockFi, giving it 28 days to show cause why it should not be directed to cease and desist from selling unregistered securities in Alabama.
On July 22, 2021, the Texas State Securities Board notified BlockFi of an upcoming hearing to determine whether to issue a proposal for decision for the entry of a cease-and-desist order against BlockFi.
On July 22, 2021, the Vermont Department of Financial Regulation issued a show cause order obligating BlockFi to show cause within 30 days why an order to cease and desist from offering BIAs in Vermont should not be entered.
On July 29, 2021, the Kentucky Department of Financial Institutions issued an emergency cease and desist order against BlockFi to prevent it from "offering securities in the form of investment contracts in relation to the deposit of virtual currencies with the company."
BlockFi has issued a statement on its website in which it expresses disagreement with the position that BIAs are securities, and states that BlockFi continues to engage in discussions with regulators.
End of Document
Resource ID w-032-1653Document Type Legal update: archive
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