The Attorney General of New Jersey orders BlockFi to immediately cease issuing new accounts, alleging their Interest Accounts are funded with unregistered securities.
The Cease and Desist order, issued through the New Jersey Bureau of Securities, claims that BlockFi’s interest accounts may be funded through the sale of unregistered securities, which violates potentially multiple regulations in the state of NJ.
Specifically the cease and desist order relates to the interest bearing accounts, and this could be the first action of its kind against DeFi lending platforms, which have seen huge growth in the last year.
“Our rules are simple: if you sell securities in New Jersey, you need to comply with New Jersey’s securities laws. No one gets a free pass simply because they’re operating in the fast-evolving cryptocurrency market. Our Bureau of Securities will be monitoring this issue closely as we work to protect investors.”Andrew J Bruck, New Jersey Bureau of Securities Attorney General
New Jersey orders BlockFi to cease and desist confirmed by CEO
BlockFi CEO Zac Prince responded on Twitter within hours, attempting to quell investor concerns saying the company remained “fully operational for existing clients in New Jersey” and publicly disagreeing with the order, stating that BIA is not a security, and therefore they disagree with the action by the NJ Bureau of Securities. He went on to say in the thread that even though New Jersey orders BlockFi to cease creating new accounts that the company will continue to engage with the relevant authorities to protect their clients interests and ensure that BlockFi’s DeFi products remain available.
After the announcement, BlockFi received some negative feedback on Prince’s post, with some users calling it a Ponzi scheme, with @cryptowhale saying it reminded him of Bitconnect, but branded slightly nicer.
The products in question which the Bureau of Securities of New Jersey orders BlockFi to cease creating new customer accounts for are those which offer interest on the lending of cryptocurrencies, with rates between 0.25% and 7.5% depending on the specific token. BlockFi offers lending for a range of different crypto’s as well as stablecoins, with higher interest rates generally available for Stablecoin lenders.
One of the other elements which the regulator highlighted is the fact that DeFi platforms do not offer SIPC or FDIC insurance like most traditional financial institutions.
Partly, one of the issues here is something which regulators themselves could be accused of being lax on. Whilst Bitcoin and ETH are considered securities, other assets which are supported by the BlockFi platform exist in a much greyer legal framework, with a lack of clarity on how the digital assets should be treated.
BlockFi has previously raised almost half a billion dollars (USD) in funding, and currently the company is valued at around $5B. Whilst the company provides similar products and services to other DeFi platforms, such as UniSwap, the company itself is centralized, and therefore we remind all our readers of the maxim “not your keys….not your crypto”, and continue to advise everyone in the Crypto space to always do their own research and consult registered Financial Advisors.
Whether this order could have significant consequences for other companies and products in the DeFi world remains to be seen. Jake Chervinsky, Counsel for DeFi competitor Compound says it’s “impossibe to say without knowing what violation NJ thinks BlockFi might have committed” whether the order will have wider reaching implications.
Furthermore, there does appear to have been a significant crackdown worldwide on Crypto firms recently, with some high profile firms being told to close operations in multiple countries, including Binance in the UK, which does appear to be having a knock on effect in post Brexit Britain.