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BlockFi Fights Regulatory Fire in 3 US States; Reportedly Wants to Go Public

Tim Alper
Last updated: | 4 min read

More state regulators are beginning to follow suit with New Jersey after the state Attorney General last week was reported to have served BlockFi, a leading American crypto lending firm, with a cease and desist order: Alabama and Texas have dished out similar orders. But it looks like the regulators’ actions have not yet derailed the company’s possible plans to go public.

Source: A screenshot, Instagram/blockfi

The New Jersey Attorney General (AG) got the ball rolling by essentially accusing BlockFi of breaking state securities laws, with its Acting Attorney General Andrew Bruck quoted as stating:

“Our rules are simple. If you sell securities in New Jersey, you need to comply with New Jersey’s securities laws.”

The AG’s office later decided to give BlockFi another week in which to stop accepting new customers based in New Jersey for interest-bearing accounts as part of its BlockFi Interest Account (BIA) initiative.

But yesterday reported that the Alabama Securities Commission (ASC) Director Joseph Borg had delivered the under-fire firm with a Show Cause Order. This order obliges the firm to explain why it should not be served up with a cease and desist order.

And now Texas has apparently come to the table. In a notice that appears to have gone offline at the time of writing, the Texas State Securities Board revealed that it had in fact been in talks with BlockFi about regulatory concerns since spring this year. The board wrote:

“On or about April 20, 2021, the Enforcement Division of the State Securities Board notified BlockFi that [it] may have offered securities in Texas that may not comply with the Securities Act. […] Nevertheless, [BlockFi has] continued to offer the BIAs to Texans in violation of Sections 7 and 12 of the Securities Act.”

On Twitter, the firm claimed that it was “fully operational for all existing clients everywhere in the world,” adding that “clients will continue to have access to all products, services and assets on BlockFi.”

The firm also issued the following statement:

“We are in active dialogue with multiple regulators to demonstrate that the BIA is not a security and should not be regulated as one. We firmly believe that the BIA is lawful and appropriate for crypto market participants, and we remain steadfast in our commitment to fight for consumers’ rights to earn interest on their crypto assets. We welcome discussions with regulators and believe that appropriate regulation of this industry is key to its future success.”

A legal expert weighed in with some analysis on Twitter: Preston Byrne, a partner at the New York offices of the corporate law firm Anderson Kill, wrote that “Alabama, and presumably New Jersey, appear to be taking the view that a BIA is not an ‘account’ but rather a product.” He claimed that it was worth noting the fact that ‘BlockFi allows investors to purchase a BIA.’”

Byrne also noted that BlockFi’s defense was also worth consideration, writing:

“At least on a preliminary basis the BlockFi issue appears to be a more interesting discussion than the usual ‘here I am selling an [initial coin offering] to lots of Americans and it’s not a security because utility’ discussion.”

The lawyer added that the crux of BlockFi’s case would likely be that BIA is more of an account than a product, and that “a bank deposit account or certificate of deposit, though performing many of the functions of a security, is not treated as a security under the federal securities laws due to the intent of Congress and a near-zero risk of default due to the application of federal banking law.”

However, Byrne also opined that this would likely not remain a matter for state regulators alone for much longer. He wrote:

“At this point, there’s no way the Feds are sitting this one out.”

But despite all the legal furor, BlockFi appears intent on pushing ahead with ambitious plans to float on an exchange. Coindesk reported that BlockFi “aims to go public in 12 to 18 months,” per documents it says were “circulated to investors” on Wednesday this week.

Although BlockFi was quoted as “declining to comment” on “the current state of its plans,” the documents reportedly show that BlockFi will close a Series E funding round on July 27, with “people familiar with the matter” claiming the round could raise USD 500m.

The documents, the media outlet continued, show that BlockFi is aiming for a whopping “USD 4.75 billion post-money valuation.”
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