The long-awaited release of President Biden’s executive order on crypto policy means we will soon be seeing more action in this area. But there is one agency that is already flexing its regulatory muscles. The Securities and Exchange Commission (SEC), whose enforcement arm is led by former New Jersey Attorney General Gurbir S. Grewal, is aggressively ratcheting up regulation and action against crypto companies.
As one of New Jersey’s leading cryptocurrency and blockchain law firms, the Dressel/Malikschmitt team is monitoring the SEC’s enforcement actions so we can help our clients ensure they are complying with all relevant federal laws.
On Valentine’s Day, the SEC charged Jersey City-based BlockFi Lending LLC (BlockFi) with failing to register the offers and sales of its retail crypto lending product — BlockFi Interest Accounts (BIAs):
“Through BIAs, investors lent crypto assets to BlockFi in exchange for the company’s promise to provide a variable monthly interest payment. The [SEC] order finds that BIAs are securities under applicable law, and the company therefore was required to register its offers and sales of BIAs but failed to do so or to qualify for an exemption from SEC registration. Additionally, the order finds that BlockFi operated for more than 18 months as an unregistered investment company because it issued securities and also held more than 40 percent of its total assets, excluding cash, in investment securities, including loans of crypto assets to institutional borrowers.”
BlockFi, which is backed by billionaire venture capitalist Peter Thiel, agreed to pay a $50 million penalty to the SEC, cease its unregistered offers and sales of BIAs, and attempt to bring its business within the provisions of the Investment Company Act of 1940 within 60 days. It will pay another $50 million to 32 states to settle similar charges.
Although it will stop offering BIAs, BlockFi plans to register with the SEC and offer consumers a new product called BlockFi Yield (BY). BlockFi anticipates BY will be the first ever SEC registered crypto interest-bearing security.
Grewal’s Influence Is Growing
As noted above, the Director of the SEC’s Division of Enforcement is Gurbir S. Grewal. Grewal gave up his job as New Jersey Attorney General to take the SEC post.
He came to the SEC knowing that regulating the crypto world would be one of his top priorities. Noting in a speech he gave shortly after taking office that, “the risks we protect against are not fixed and what’s important to investors and the market can evolve over time. That’s why the Division is—as it always has—taking proactive steps to police those issues as well by bringing a number of first of their kind enforcement actions.” He then went on to list several actions taken against crypto companies.
After the SEC announced the BlockFi settlement, there was some speculation that the agency would take it easy on other companies that follow BlockFi’s lead and try to bring their products and services into compliance with SEC regulations. Some even hoped for some sort of grace period where everyone who came forward would get a one-time free pass.
However, in an interview with Reuters, Grewal made it clear that the SEC will not offer amnesty to cryptocurrency companies that self-report violations of securities laws:
“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 the securities laws… Our message is that we’ll view their conduct more favorably if they come in—such as what the remedies will look like, including penalties, and finding a path to complying with the securities laws. That’s the benefit entities get from self-reporting violations and working with us.”
The Dressel/Malikschmitt team will be watching to see how companies that come forward are treated.
Cryptocurrency and Digital Currency Attorneys in New Jersey
New Jersey companies and personalities are playing an outsize role in the development of federal policy on cryptocurrency and blockchain technology. As one of the state’s leading law firms in this area, Dressel/Malikschmitt LLP will continue to advise our crypto clients on best practices, and fight for them if disputes arise.
To contact the attorneys at Dressel/Malikschmitt LLP, call us at (848) 202-9323, or fill out our Contact Us form for a free consultation.