18 ms·

Blockfi agrees to pay $100M in penalties and pursue registration

236 points by mrpatiwi 5y ago

joelbondurant1 5y ago
joelbondurant1 5y ago
[dead]
maerF0x0 5y ago
Good for the SEC and for BlockFi for keeping these kinds of things in the public purview. I hate how the FDA has so little teeth, comparatively. Eg: https://peckford42.wordpress.com/2021/10/05/pfizer-covering-up-the-truth-with-out-of-court-settlements-worth-billions-of-dollars/ https://peckford42.wordpress.com/2021/10/05/pfizer-covering-...
- arcticbull 5y ago
  It's just too bad that the SEC's fines are small enough that companies can absorb them. Feels more like they're getting their beaks wet. They need to impose significantly higher penalties and even dissolve the business if appropriate.
  - duxup 5y ago
    Provided we're not talking about an economy crashing act. Fines probably should be lower than "can't absorb them". The prospect of the SEC crashing every rando company with fines isn't great. Lotta people hurt who had nothing to do with it. I worked at a company that pulled some illegal stuff with backdating stock awards and so on. CEO actually went to jail. I'm glad I still had a job and the company rolled on, our customers were probably happy too.
    - deleted 5y ago
      [deleted]
    - maerF0x0 5y ago
      I think by "absorb" the poster meant "Pay the fine and still make a profit from the fine inducing activity"
      - arcticbull 5y ago
        Thanks! Yes, that's exactly what I meant.
capableweb 5y ago
Interesting to read BlockFi's own statement about the event: https://blockfi.com/regulatory-developments/ https://blockfi.com/regulatory-developments/ No mention of the fine at all, and instead framed as "first SEC registered crypto interest-bearing security" (from BlockFi's page) rather than "[BlockFi] failing to register the offers and sales of its retail crypto lending product" and "the SEC also charged BlockFi with violating the registration provisions of the Investment Company Act of 1940" (both quotes from the SEC statement). BlockFi also doesn't mention the "false and misleading statement for more than two years on its website" part that the SEC highlights, and instead says "Both the SEC and state-level agreements contain no admission or denial of wrongdoing or liability." Going to be interesting to see how the space develops moving forward. Hopefully companies that continue to mislead people will eventually disappear, or at least not be this popular among the masses.
- pm90 5y ago
  They won’t. The desire for making a quick buck is too strong. The avalanche of marketing around crypto is going to lead many gullible people to “invest” in crypto and lose their money. Unless regulators shut them down or expose them quite clearly as mlm/ frauds I suspect this isn’t going to stop.
  - capableweb 5y ago
    > Unless regulators shut them down or expose them quite clearly as mlm/ frauds I suspect this isn’t going to stop. It seems, based on this action that the SEC just went through with, that things like BlockFi are not "clearly MLM / fraud" as you say, as otherwise they would indeed try to get them shutdown, not just slap a tiny fine on them.
    - cuteboy19 5y ago
      The SEC doesn't do MLMs. Herbalife and Lularoe operate in broad daylight. The US has always been very kind to such scams
      - 5y ago
pavlov 5y ago
The SEC has a whistleblower program that can award up to 30% of the fine to a whistleblower. Here's an example of someone receiving $32 million: https://www.sec.gov/news/press-release/2021-211 https://www.sec.gov/news/press-release/2021-211 If crypto prices go down, it might become more lucrative for crypto employees to start talking to SEC rather than trying to sell their tokens. If you work at one of these places, why not start collecting documentation now.
- SilasX 5y ago
  Not sure the relevance, or how this story would remind you of that program, since BlockFi doesn’t issue a token, nor was the product in question secret. Disclosure: used BlockFi’s lending program and had pulled out most of my holdings for unrelated reasons by last week.
  - capableweb 5y ago
    Agreed. The SEC claims it broke regulations by doing "unregistered offers and sales of the lending product", "operated for more than 18 months as an unregistered investment company" and "false and misleading statement for more than two years on its website concerning the level of risk", none of which would be exposed by a whistleblower but instead by just going to their website or having an account there. Nothing that requires someone from inside the company to whistleblow anything.
    - pavlov 5y ago
      And if that's available just by going to a crypto company's website, imagine what kind of evidence an insider may have access to.
  - Cederfjard 5y ago
    I think it was pretty easy to follow the reasoning. Cryptocurrency companies seem too often play fast and loose with laws and regulations, and the SEC can and will fine them. In addition, whistleblowers can get handsomely rewarded. Ergo, it might soon start to look more and more attractive for a lot of employees to tell on their employers. Even if this particular case didn't go down like that, I still think it's an interesting point that's relevant to the discussion.
coconut08 5y ago
Is there something about Gemini's version of the interest bearing account that makes it less problematic than Blockfi's offering? Why is it that Blockfi has taken so much heat and Gemini has seemed to fly completely under the radar? Does this suggest that the issue was the marketing and the implementation that was the issue rather than the product itself?
- capableweb 5y ago
  I guess it could have something to do with that Gemini is a registered exchange and regulated by the NYDFS, while BlockFi goes the more traditional cryptocurrency exchange route of "Let's see what turns out to be illegal when we get there".
  - notpachet 5y ago
    That route has a pithier name: "disruption"
  - ValentineC 5y ago
    Note that Gemini Earn is run by Genesis Global Capital, not Gemini themselves: https://www.gemini.com/legal/gemini-earn-program-terms-and-authorization-agreement https://www.gemini.com/legal/gemini-earn-program-terms-and-a...
- pazimzadeh 5y ago
  Same question, with Celsius.
  - cypherpunks01 5y ago
    Coindesk writes, "The SEC is reportedly investigating Voyager Digital, Gemini Trust and fellow crypto lender Celsius Network." There is no difference.
  - deleted 5y ago
    [deleted]
- rabite 5y ago
Andrew_nenakhov 5y ago
Good. Now, please, unravel this Tether fraud.
- anonporridge 5y ago
  Also the Ethereum unregistered security fraud.
  - aaaaaaaaata 5y ago
    What was/is(?) fraudulent about it, from the perspective of a single citizen who invested?
    - anonporridge 5y ago
      I never said fraudulent. Just an unregistered security, which is potentially illegal because the Ethereum foundation that sold and profited off the initial premined tokens to the public without proper disclosure required of a legal security sale. The result is that we now have no idea how much insider trading actually went on in that premine sale. For example, it could be the case that most Ethereum is secretly controlled by a tiny, tightly knit cabal of people who collude to pump up the price to a false valuation. If this were true, it would be incredibly problematic with their planned transition to proof of stake, because a tiny number of people would effectively have full control over the fate of the protocol and all the money outsiders hold in ETH.
      - sincerely 5y ago
        Ok, you didn't call it fraudulent, you called it fraud - is that not a distinction without a difference?
        anonporridge 5y ago
        Ah, I did. Apologies. I should not have conflated my personal feelings with it with the facts of its suspicious and unverifiable initial distribution.
latchkey 5y ago
BlockFi has spun it as gaining clarity. https://twitter.com/BlockFiZac/status/1493256919406022656 https://twitter.com/BlockFiZac/status/1493256919406022656
seaourfreed 5y ago
- smt88 5y ago
  Your question is answered by literally the first sentence of the article. In the US, it's illegal to sell securities without registering with the SEC.
- duxup 5y ago
  Looks like they broke the law.
- ilamont 5y ago
  The 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.
300bps 5y ago
...and at the end of the day DeFi will be so regulated it will have all the bad parts of DeFi and regular finance.
- somebodythere 5y ago
  Nothing decentralized about BlockFi.
- smt88 5y ago
  Regulations are the good parts of regular finance. There are no financial regulations that currently harm me, a consumer. We honestly need to return to a time when we had a bit more financial regulation.
  - chernevik 5y ago
    Stuff like S-1 filings are complicated, slow and expensive. I'm prepared to believe there is a better way -- but someone has to tell me that better way actually is. So far, I'm not hearing much here.
  - astrange 5y ago
    > There are no financial regulations that currently harm me, a consumer. All consumer banks have identical products, preventing you from starting things like a tontine/friends cash pool without a business behind it. KYC means you have to send in recordings of your face. Accredited investor rules often mean only rich people can get richer. There's definitely some harmful ones.
    - smt88 5y ago
      > preventing you from starting things like a tontine/friends cash pool without a business behind it This is untrue in the US. Nothing is stopping you from contracting a tontine among friends. You just can't sell it to strangers. > KYC means you have to send in recordings of your face. This is untrue in the US too. Where do you have to do this? > Accredited investor rules often mean only rich people can get richer. I don't buy this. Most things that require accreditation are extremely risky. The best asset classes (passive index funds) are available to everyone. People of moderate net worth should avoid assets like venture equity like the plague.
seaourfreed 5y ago
mdoms 5y ago
https://www.reddit.com/r/blockfi/comments/skxiei/blockfi_horrible_loan_experience_fortune_lost/ https://www.reddit.com/r/blockfi/comments/skxiei/blockfi_hor...
shafyy 5y ago
Striking how BlockFi's official announcement reads compared to the SEC's statement: https://blockfi.com/regulatory-developments/ https://blockfi.com/regulatory-developments/ Zac Prince, CEO and Founder of BlockFi, said: “From the day we started BlockFi, we have always known that strong engagement with regulators would be critical for the adoption of financial services powered by cryptocurrencies. Today’s milestone is yet another example of our pioneering efforts in securing regulatory clarity for the broader industry and our clients, just as we did for our first product – the crypto-backed loan. We intend for BlockFi Yield to be a new, SEC-registered crypto interest-bearing security, which will allow clients to earn interest on their crypto assets.”
- celticninja 5y ago
  Company spins news to make itself look good. Nothing new here, definitely nothing unique to cryptocurrency companies.
  - discodave 5y ago
    Do you have any examples of non-crypto companies trying to spin a $100MM fine as "pioneering efforts in securing regulatory clarity"? I know companies spin, but this is next level.
    - freemint 5y ago
      It spins so hard, if you attached an electric generator you could power all the bitcoin miners. /Joke
    - celticninja 5y ago
      "By adopting the reforms embodied in the settlement, Merrill Lynch is setting a new standard for the rest of the industry to follow," Spitzer said. This was in relation to a $100m fine for Merrill Lynch. https://products.kitsapsun.com/archive/2002/05-22/0054_merrill_lynch__company_to_pay__10.html https://products.kitsapsun.com/archive/2002/05-22/0054_merri... This took a whole minute to Google, comment and attribute/source. So it's pretty disingenuous of you to act like this is cryptocurrency specific behaviour when in fact it is standard behaviour for all companies who are fines. I'm not saying it is right but it is hardly a novel approach to dealing with an SEC fine.
deleted 5y ago
[deleted]
dbodin11 5y ago
[dead]
abritrum 5y ago
I (along with other) have been filing whistleblower reports on blatant price manipulation on an OTC stock for the entirety of last year (about 30 reports of naked short selling, wash trading). Not one peep from the SEC. It's been eye-opening to see the amount of fraud in the financial markets that goes unchecked. Sometimes I question my sanity that I persist in this stock and whether what I see is illegal. Good to see that they are going after bigger fish, letting the smaller ones go.
- snapcaster 5y ago
  Gamestop bagholder I presume? How do you detect or prove naked shorting or wash trading?
  - abritrum 5y ago
    Not gamestop, I said OTC. There is no way to prove naked shorting or wash trading without access to sell tickets. But the signs are there. I added some more of these details in my post of chollida1.
- PragmaticPulp 5y ago
  > on blatant price manipulation on an OTC stock Which stock? There are a lot of cult-ish communities around certain stocks that "know just enough to be dangerous" and end up misinterpreting a lot of signals as naked shorting and such. The narratives sound good to people who are holding the stock, but they're almost always completely flawed. If the complaints are basically coming in bulk with the same reports that can be traced back to a Reddit post or something, they're probably going straight to the trash.
  - abritrum 5y ago
    I agree that there are conspiracy minded folks who get stuck in the rut here. I am worried of course that I somehow stumbled on one. Please see my response to chollida1 which has some more color.
- chollida1 5y ago
wmf 5y ago
Some people have a "lightning doesn't strike twice" theory about the SEC where getting busted once means you can do the same thing 10x more in the future and won't be busted again. So a $100M fine today unlocks billions in "legitimate" profit tomorrow.
- frankbreetz 5y ago
  This seems like an insane theory, it's like saying if you commit an assault you won't be a suspect for murder later. Committing a crime generally make the authorities look at you more closely.
- smoovb 5y ago
  Why would a business pay the this large fine, unless it lead to their continued existence and profitability. In this case the word 'fine' is better thought of as 'registration fee'. Being forced to stop their current product (BIAs) and relaunch the new Yield product seems to indicate the new product has the SEC's blessing.
dna_polymerase 5y ago
HSBC got fined $84M for laundering mexican drug cartel money. The proportions don't add up. https://www.complianceweek.com/regulatory-enforcement/hsbc-hit-with-84m-penalty-over-aml-failings/31184.article https://www.complianceweek.com/regulatory-enforcement/hsbc-h...
- mint2 5y ago
  Yeah hsbc should have been fined more.
  - consumer451 5y ago
    Shouldn't the director(s) be held responsible at all? It seems like if people escape consequences this behavior will continue.
    - missedthecue 5y ago
      Only if you can prove they committed a crime. HSBC has more than 230,000 employees. Statistically, someone will always be doing something wrong.
- missedthecue 5y ago
  They paid $84M to the European regulator. The US regulator made them pay $1.9 Billion. https://www.reuters.com/article/us-hsbc-probe/hsbc-to-pay-1-9-billion-u-s-fine-in-money-laundering-case-idUSBRE8BA05M20121211 https://www.reuters.com/article/us-hsbc-probe/hsbc-to-pay-1-...
PragmaticPulp 5y ago
Where is the $100 million going to come from? Do they have that much money to spare? Or are their customers about to take a haircut? On that topic, where does BlockFi's profit come from? They're offering 9% (previously 12%) interest on deposits. Are they really re-loaning that money to other people at the 20-30% interest rate required to produce those returns (high interest rates come with high default rates, so you need to overshoot your target by a lot to make up for defaults).
- tcgv 5y ago
  Not sure how BlockFi works exactly but most lending DeFi apps have really high collateral requirements and liquidate positions in case of violation of collateral requirements charging a penalty to close open positions early and ensure protocol assets are preserved before a "default" event can ever happen. They're not really "capital efficient".
  - xur17 5y ago
    If you have some time, this [0] is a pretty good write up of a number of different cefi lending platforms. The part I find most interesting is that most places lend to Genesis Trading to generate most of their return, in some cases also lending out smaller portions themselves. [0] https://prohashing.com/guides/earning-interest-on-crypto https://prohashing.com/guides/earning-interest-on-crypto
- AJ007 5y ago
  I think a lot of these yields from “crypto” are on paper, and it’s misleading the “defi” operators and their investors in to thinking they have huge returns. That’s the only way that would systematically explain lending tokens at very high interest rates.
  - e4e78a06 5y ago
    They're primarily lending to institutional customers (hedge funds, HFT's). If you look on DeFi markets borrowing a couple billion dollars is going to cost you a lot more than the 10% BlockFi is probably charging, due to how automated lending mechanisms work. The reason the yield is so high is because there's insufficient liquidity in ETH/BTC/stablecoins. Notice also that these loans are undercollateralized. DeFi lending requires overcollateralization which often is not appealing to HFT's executing low-risk arbitrage trades that make a few bps of profit. They need big leverage to make decent money. In our normal financial system banks are willing to lend them money, but in DeFi nobody does undercollateralized loans.
jonathan-adly 5y ago
1. This is a PR win for the SEC. It can now go to congress and say, see, we are working with Crypto companies! (while they really aren't, not in good faith anyway). 2. This is a win for Blockfi. Like other mentions, they gave their business a legal veneer for the sum for $100m. If you are of the opinion that all Cryptos and related companies are scams. Guess what? The SEC disagrees. 3. The same product (even better actually) is done via DeFi. That's where the real battle will be with major implications on the Ethereum ecosystem (or whatever Dapp blockchain you prefer).
- babyshake 5y ago
  > The same product (even better actually) is done via DeFi. That's where the real battle will be with major implications on the Ethereum ecosystem (or whatever Dapp blockchain you prefer). The US gov could require teams based in the US to require KYC in their apps for US citizens. And they can require US citizens to only use apps with KYC. But can they really do much beyond that?
  - jonathan-adly 5y ago
    That would be in violation of the securities laws that blockfi is accused of violating. Per this case, the SEC stand is interest bearing crypto -> a security
- ProjectArcturis 5y ago
  Definitely not a win for BlockFi. Definitely not an endorsement of crypto by the SEC. As part of the settlement, BlockFi had to agree to stop doing all that illegal stuff. "To settle the SEC’s charges, BlockFi agreed to pay a $50 million penalty, cease its unregistered offers and sales of the lending product, BlockFi Interest Accounts (BIAs), and attempt to bring its business within the provisions of the Investment Company Act within 60 days."
  - managerclass 5y ago
    > BlockFi had to agree to stop doing all that illegal stuff Have they though? From Blockfi: "As part of the resolution, existing U.S. BlockFi Interest Account (BIA) clients will maintain their accounts and receive interest as they always have, but cannot add new assets to their accounts as of today, February 14, 2022. Further, U.S. persons will not be able to open new BIAs. Following completion of the SEC registration process for BlockFi Yield, BIAs of U.S. clients will be exchanged for BlockFi Yield, unless a client instructs BlockFi otherwise. BIAs of BlockFi clients outside of the U.S. are not subject to today’s resolution." Sounds like existing accounts can continue to function and accrue interest but no addition new users or assets can be deposited until they get SEC approval.
Animats 5y ago
Basically, the Investment Act of 1934 says: 1. You have to file a prospectus (an S-1) before collecting money. 2. You have to disclose a lot of stuff, like who's really behind this, where the money goes, what the risks are, what's happened so far, and what the business plan is. 3. Lying in an S-1 is a crime. Crypto schemes tend to violate 1), because 2) would show that their scheme is a scam, and if they tried to cover that up, 3) would put them in jail. There's grumbling about "paperwork", but that's just an excuse. It's the part about having to disclose all that stuff under penalty of perjury that scammers hate.
- nikanj 5y ago
  Luckily they can run the whole scheme from Elbonia, and people are more than happy to send over cryptos from the US.
  - numtel 5y ago
    Well, there is Nexo which is basically the same but headquartered in Bulgaria.
  - cuteboy19 5y ago
    That's almost exactly how Tether (USDT) works. Except instead of Elbonia we have the Caymans
    - altairprime 5y ago
      Note that Tether moving to the Caymans inspired the UK finregs to investigate the UK accounting company that’s now running Tether’s books, so I wouldn’t consider the Caymans to be a successful escape yet: https://www.ft.com/content/e86f8d72-918c-4a80-a4bf-de3110316076 https://www.ft.com/content/e86f8d72-918c-4a80-a4bf-de3110316...
- thebean11 5y ago
  Is BlockFi a scam though? Fraud is not what they are getting fined for, and it sounds like they can continue to operate if they meet these reporting requirements, and that the company intends to do that.
5350-uiop-1130 5y ago
I've had trouble finding clear jargon-free sources to explain how these lending platforms and various defi lending platforms generate yield. As far as I can tell it mostly works by token inflation. Celsius, Nexo tokens, Compound and Aave tokens for example. But these tokens are given as a reward to yield farmers so there is a huge sell pressure and yet I don't understand who is on the buy side. Why would you buy these reward tokens. It seems strange to me.
- SilasX 5y ago
  I can answer that, since I'm using Compound (and Uniswap). To start with, they lend out at interest, which is paid by users, for the same reason anyone would take a collateral-backed loan, knowing they'll have to pay interest. It could be speculation on sh-tcoins, investment in stocks, whatever. The Compound contract doesn't care because they're more-than-fully backed and have a mechanism for liquidation at a profit if the loan/collateral value ratio gets too high. A fraction of that is then paid to depositors (whether or not they're borrowing against said deposits). In some cases there are tax advantages in that you can avoid selling crypto while converting it into a different asset you'd prefer to invest in.[1] They also allocate Compound tokens (COMP) to depositors and borrowers (that's the distribution yield figure you see). While COMP's value is highly speculative, its grounding (for whatever that's worth) comes from the fact that the tokens entitle you to vote on changes to the Compound contract[2], which some people apparently value and are willing to pay for. You also need a minimum number of tokens (100,000 IIRC) to submit proposals. I don't know their process for deciding the distribution yield, but it sometimes leads to weird situations where it's higher than the interest rates for borrowing, meaning that (modulo fluctuations in the rates and value of COMP) you're being paid to borrow it. See, for example, the yields on Basic Attention Token (BAT) [3] -- 10.23% dist yield vs 3.84% borrow rate. As things stand now the interest on borrowing ETH is about the same as its borrowing distribution yield, meaning you can effectively borrow for free (again, modulo those fluctuations). I starting doing that to convert BTC to ETH that I use in Uniswap liquidity pools, which make money as automated market makers, taking a cut of conversions between cryptocurrencies. [1] Though, until the IRS clarifies, it's an open question whether putting up your crypto on Compound etc for these loans is a taxable event, as it's booked on the blockchain as conversion of e.g. Ethereum (ETH) to Compound Ethereum (cETH). I think that it should (obviously) have the same tax consequences as taking a loan at a pawn shop with your gold chains as collateral (i.e. there's no sale unless/until you default on the loan, in which case you have sold it for whatever amount they lent you that hasn't been paid back). [2] https://app.compound.finance/#vote https://app.compound.finance/#vote [3] https://compound.finance/markets/BAT https://compound.finance/markets/BAT
yrral 5y ago
Here is SEC commissioner Hester Peirce's dissenting opinion: https://www.sec.gov/news/statement/peirce-blockfi-20220214 https://www.sec.gov/news/statement/peirce-blockfi-20220214 Essentially she says that while they did misrepresent the over collateralization, a 100m fine is too much since they did fulfill their end of the loans. Additionally, she says that the categorization this stuff as securities is not effective. US consumers want interest on their crypto-assets now, but with companies having to jump through complicated SEC hoops this type of product will not be available in the near future (or maybe never available); not because of "customer protection" issues but because of sec over-regulation issues.
- chernevik 5y ago
  BlockFi has already blown its chance to provide full and reliable information on its own. The complaint here isn't that BlockFi made full disclosure but just forgot to check the S-1 box. The disclosures they have made were _false_. They wouldn't be paying $100mm otherwise. And it doesn't matter whether BlockFi has paid its loans so far. If misrepresentation of collateralization is penalized only when loans aren't paid, then it can never be penalized at all. I can easily believe that US accounting practices have problems with crypto; do we even have GAAP for this stuff? And it's easy to complain that SEC filings are complex and time-consuming. But at the end of the day there must be some sort of accounting of how these companies and products work. I suspect that a lot of crypto products won't meet SEC disclosure requirements because they can't meet any real disclosure requirement. And if that's right, then no, they shouldn't be available.
- kkielhofner 5y ago
  In the rotating door that is regulators and the industries they regulate she’s going to end up at a crypto company.
- Comevius 5y ago
  She always gives a partisan, anti-regulation opinion in these. She says that cryptocurrencies need new rules, but she never elaborates. She wants to keep the barrier of entry low while having meaningful protection for customers. Without regulation or oversight. How? Nobody knows. She doesn't either.
rr808 5y ago
Now you know why traditional payment processors are so expensive. You have to pay the fines + you need to pay for the armies of people to do the extra paperwork.
MisterBastahrd 5y ago
P1: Would you like to buy this banana? P2: That's an apple. P1: No, it's a banana. P2: Dude, that's clearly an apple. P1: Okay, it's an apple, but by pretending it's yellow and long, we're bypassing the rules for selling apples. P2: That's not.... that's now how any of this works
deleted 5y ago
[deleted]
AviationAtom 5y ago
I had a hunch some action of this sort was coming down the pipeline. The problem is that so many of these companies give the appearance of being fully law-abiding companies, but there isn't necessarily an easy to check that. I found it somewhat alarming that people proclaimed that 9% APY interest could be made, in such a way that it implied no risk, in much the same way cash in an FDIC-insured bank account is well-protected. I think much of this is moving so fast that it's going to take some time before the offerings really come close to offering the same level of safety one finds with an FDIC-insured bank account.
exabrial 5y ago
What irritates me about this is it has to be sold as a "security" and a crypto bank account is completely out of the question. If you're putting your money in your bank, and they're loaning it out, is that now a security?

236 points by mrpatiwi 5y ago

[dead]

Good for the SEC and for BlockFi for keeping these kinds of things in the public purview. I hate how the FDA has so little teeth, comparatively. Eg: https://peckford42.wordpress.com/2021/10/05/pfizer-covering-up-the-truth-with-out-of-court-settlements-worth-billions-of-dollars/ https://peckford42.wordpress.com/2021/10/05/pfizer-covering-...

arcticbull 5y ago
It's just too bad that the SEC's fines are small enough that companies can absorb them. Feels more like they're getting their beaks wet. They need to impose significantly higher penalties and even dissolve the business if appropriate.
- duxup 5y ago
  Provided we're not talking about an economy crashing act. Fines probably should be lower than "can't absorb them". The prospect of the SEC crashing every rando company with fines isn't great. Lotta people hurt who had nothing to do with it. I worked at a company that pulled some illegal stuff with backdating stock awards and so on. CEO actually went to jail. I'm glad I still had a job and the company rolled on, our customers were probably happy too.
  - deleted 5y ago
    [deleted]
  - maerF0x0 5y ago
    I think by "absorb" the poster meant "Pay the fine and still make a profit from the fine inducing activity"
    - arcticbull 5y ago
      Thanks! Yes, that's exactly what I meant.

capableweb 5y ago

Interesting to read BlockFi's own statement about the event: https://blockfi.com/regulatory-developments/ https://blockfi.com/regulatory-developments/ No mention of the fine at all, and instead framed as "first SEC registered crypto interest-bearing security" (from BlockFi's page) rather than "[BlockFi] failing to register the offers and sales of its retail crypto lending product" and "the SEC also charged BlockFi with violating the registration provisions of the Investment Company Act of 1940" (both quotes from the SEC statement). BlockFi also doesn't mention the "false and misleading statement for more than two years on its website" part that the SEC highlights, and instead says "Both the SEC and state-level agreements contain no admission or denial of wrongdoing or liability." Going to be interesting to see how the space develops moving forward. Hopefully companies that continue to mislead people will eventually disappear, or at least not be this popular among the masses.

pm90 5y ago
They won’t. The desire for making a quick buck is too strong. The avalanche of marketing around crypto is going to lead many gullible people to “invest” in crypto and lose their money. Unless regulators shut them down or expose them quite clearly as mlm/ frauds I suspect this isn’t going to stop.
- capableweb 5y ago
  > Unless regulators shut them down or expose them quite clearly as mlm/ frauds I suspect this isn’t going to stop. It seems, based on this action that the SEC just went through with, that things like BlockFi are not "clearly MLM / fraud" as you say, as otherwise they would indeed try to get them shutdown, not just slap a tiny fine on them.
  - cuteboy19 5y ago
    The SEC doesn't do MLMs. Herbalife and Lularoe operate in broad daylight. The US has always been very kind to such scams
    - 5y ago

pavlov 5y ago

The SEC has a whistleblower program that can award up to 30% of the fine to a whistleblower. Here's an example of someone receiving $32 million: https://www.sec.gov/news/press-release/2021-211 https://www.sec.gov/news/press-release/2021-211 If crypto prices go down, it might become more lucrative for crypto employees to start talking to SEC rather than trying to sell their tokens. If you work at one of these places, why not start collecting documentation now.

SilasX 5y ago
Not sure the relevance, or how this story would remind you of that program, since BlockFi doesn’t issue a token, nor was the product in question secret. Disclosure: used BlockFi’s lending program and had pulled out most of my holdings for unrelated reasons by last week.
- capableweb 5y ago
  Agreed. The SEC claims it broke regulations by doing "unregistered offers and sales of the lending product", "operated for more than 18 months as an unregistered investment company" and "false and misleading statement for more than two years on its website concerning the level of risk", none of which would be exposed by a whistleblower but instead by just going to their website or having an account there. Nothing that requires someone from inside the company to whistleblow anything.
  - pavlov 5y ago
    And if that's available just by going to a crypto company's website, imagine what kind of evidence an insider may have access to.
- Cederfjard 5y ago
  I think it was pretty easy to follow the reasoning. Cryptocurrency companies seem too often play fast and loose with laws and regulations, and the SEC can and will fine them. In addition, whistleblowers can get handsomely rewarded. Ergo, it might soon start to look more and more attractive for a lot of employees to tell on their employers. Even if this particular case didn't go down like that, I still think it's an interesting point that's relevant to the discussion.

coconut08 5y ago

Is there something about Gemini's version of the interest bearing account that makes it less problematic than Blockfi's offering? Why is it that Blockfi has taken so much heat and Gemini has seemed to fly completely under the radar? Does this suggest that the issue was the marketing and the implementation that was the issue rather than the product itself?

capableweb 5y ago
I guess it could have something to do with that Gemini is a registered exchange and regulated by the NYDFS, while BlockFi goes the more traditional cryptocurrency exchange route of "Let's see what turns out to be illegal when we get there".
- notpachet 5y ago
  That route has a pithier name: "disruption"
- ValentineC 5y ago
  Note that Gemini Earn is run by Genesis Global Capital, not Gemini themselves: https://www.gemini.com/legal/gemini-earn-program-terms-and-authorization-agreement https://www.gemini.com/legal/gemini-earn-program-terms-and-a...
pazimzadeh 5y ago
Same question, with Celsius.
- cypherpunks01 5y ago
  Coindesk writes, "The SEC is reportedly investigating Voyager Digital, Gemini Trust and fellow crypto lender Celsius Network." There is no difference.
- deleted 5y ago
  [deleted]
rabite 5y ago

Andrew_nenakhov 5y ago

Good. Now, please, unravel this Tether fraud.

anonporridge 5y ago
Also the Ethereum unregistered security fraud.
- aaaaaaaaata 5y ago
  What was/is(?) fraudulent about it, from the perspective of a single citizen who invested?
  - anonporridge 5y ago
    I never said fraudulent. Just an unregistered security, which is potentially illegal because the Ethereum foundation that sold and profited off the initial premined tokens to the public without proper disclosure required of a legal security sale. The result is that we now have no idea how much insider trading actually went on in that premine sale. For example, it could be the case that most Ethereum is secretly controlled by a tiny, tightly knit cabal of people who collude to pump up the price to a false valuation. If this were true, it would be incredibly problematic with their planned transition to proof of stake, because a tiny number of people would effectively have full control over the fate of the protocol and all the money outsiders hold in ETH.
    - sincerely 5y ago
      Ok, you didn't call it fraudulent, you called it fraud - is that not a distinction without a difference?
      - anonporridge 5y ago
        Ah, I did. Apologies. I should not have conflated my personal feelings with it with the facts of its suspicious and unverifiable initial distribution.

latchkey 5y ago

BlockFi has spun it as gaining clarity. https://twitter.com/BlockFiZac/status/1493256919406022656 https://twitter.com/BlockFiZac/status/1493256919406022656

seaourfreed 5y ago

smt88 5y ago
Your question is answered by literally the first sentence of the article. In the US, it's illegal to sell securities without registering with the SEC.
duxup 5y ago
Looks like they broke the law.
ilamont 5y ago
The 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.

300bps 5y ago

...and at the end of the day DeFi will be so regulated it will have all the bad parts of DeFi and regular finance.

somebodythere 5y ago
Nothing decentralized about BlockFi.
smt88 5y ago
Regulations are the good parts of regular finance. There are no financial regulations that currently harm me, a consumer. We honestly need to return to a time when we had a bit more financial regulation.
- chernevik 5y ago
  Stuff like S-1 filings are complicated, slow and expensive. I'm prepared to believe there is a better way -- but someone has to tell me that better way actually is. So far, I'm not hearing much here.
- astrange 5y ago
  > There are no financial regulations that currently harm me, a consumer. All consumer banks have identical products, preventing you from starting things like a tontine/friends cash pool without a business behind it. KYC means you have to send in recordings of your face. Accredited investor rules often mean only rich people can get richer. There's definitely some harmful ones.
  - smt88 5y ago
    > preventing you from starting things like a tontine/friends cash pool without a business behind it This is untrue in the US. Nothing is stopping you from contracting a tontine among friends. You just can't sell it to strangers. > KYC means you have to send in recordings of your face. This is untrue in the US too. Where do you have to do this? > Accredited investor rules often mean only rich people can get richer. I don't buy this. Most things that require accreditation are extremely risky. The best asset classes (passive index funds) are available to everyone. People of moderate net worth should avoid assets like venture equity like the plague.

seaourfreed 5y ago

mdoms 5y ago

https://www.reddit.com/r/blockfi/comments/skxiei/blockfi_horrible_loan_experience_fortune_lost/ https://www.reddit.com/r/blockfi/comments/skxiei/blockfi_hor...

shafyy 5y ago

Striking how BlockFi's official announcement reads compared to the SEC's statement: https://blockfi.com/regulatory-developments/ https://blockfi.com/regulatory-developments/ Zac Prince, CEO and Founder of BlockFi, said: “From the day we started BlockFi, we have always known that strong engagement with regulators would be critical for the adoption of financial services powered by cryptocurrencies. Today’s milestone is yet another example of our pioneering efforts in securing regulatory clarity for the broader industry and our clients, just as we did for our first product – the crypto-backed loan. We intend for BlockFi Yield to be a new, SEC-registered crypto interest-bearing security, which will allow clients to earn interest on their crypto assets.”

celticninja 5y ago
Company spins news to make itself look good. Nothing new here, definitely nothing unique to cryptocurrency companies.
- discodave 5y ago
  Do you have any examples of non-crypto companies trying to spin a $100MM fine as "pioneering efforts in securing regulatory clarity"? I know companies spin, but this is next level.
  - freemint 5y ago
    It spins so hard, if you attached an electric generator you could power all the bitcoin miners. /Joke
  - celticninja 5y ago
    "By adopting the reforms embodied in the settlement, Merrill Lynch is setting a new standard for the rest of the industry to follow," Spitzer said. This was in relation to a $100m fine for Merrill Lynch. https://products.kitsapsun.com/archive/2002/05-22/0054_merrill_lynch__company_to_pay__10.html https://products.kitsapsun.com/archive/2002/05-22/0054_merri... This took a whole minute to Google, comment and attribute/source. So it's pretty disingenuous of you to act like this is cryptocurrency specific behaviour when in fact it is standard behaviour for all companies who are fines. I'm not saying it is right but it is hardly a novel approach to dealing with an SEC fine.

deleted 5y ago

[deleted]

dbodin11 5y ago

[dead]

abritrum 5y ago

I (along with other) have been filing whistleblower reports on blatant price manipulation on an OTC stock for the entirety of last year (about 30 reports of naked short selling, wash trading). Not one peep from the SEC. It's been eye-opening to see the amount of fraud in the financial markets that goes unchecked. Sometimes I question my sanity that I persist in this stock and whether what I see is illegal. Good to see that they are going after bigger fish, letting the smaller ones go.

snapcaster 5y ago
Gamestop bagholder I presume? How do you detect or prove naked shorting or wash trading?
- abritrum 5y ago
  Not gamestop, I said OTC. There is no way to prove naked shorting or wash trading without access to sell tickets. But the signs are there. I added some more of these details in my post of chollida1.
PragmaticPulp 5y ago
> on blatant price manipulation on an OTC stock Which stock? There are a lot of cult-ish communities around certain stocks that "know just enough to be dangerous" and end up misinterpreting a lot of signals as naked shorting and such. The narratives sound good to people who are holding the stock, but they're almost always completely flawed. If the complaints are basically coming in bulk with the same reports that can be traced back to a Reddit post or something, they're probably going straight to the trash.
- abritrum 5y ago
  I agree that there are conspiracy minded folks who get stuck in the rut here. I am worried of course that I somehow stumbled on one. Please see my response to chollida1 which has some more color.
chollida1 5y ago

wmf 5y ago

Some people have a "lightning doesn't strike twice" theory about the SEC where getting busted once means you can do the same thing 10x more in the future and won't be busted again. So a $100M fine today unlocks billions in "legitimate" profit tomorrow.

frankbreetz 5y ago
This seems like an insane theory, it's like saying if you commit an assault you won't be a suspect for murder later. Committing a crime generally make the authorities look at you more closely.
smoovb 5y ago
Why would a business pay the this large fine, unless it lead to their continued existence and profitability. In this case the word 'fine' is better thought of as 'registration fee'. Being forced to stop their current product (BIAs) and relaunch the new Yield product seems to indicate the new product has the SEC's blessing.

dna_polymerase 5y ago

HSBC got fined $84M for laundering mexican drug cartel money. The proportions don't add up. https://www.complianceweek.com/regulatory-enforcement/hsbc-hit-with-84m-penalty-over-aml-failings/31184.article https://www.complianceweek.com/regulatory-enforcement/hsbc-h...

mint2 5y ago
Yeah hsbc should have been fined more.
- consumer451 5y ago
  Shouldn't the director(s) be held responsible at all? It seems like if people escape consequences this behavior will continue.
  - missedthecue 5y ago
    Only if you can prove they committed a crime. HSBC has more than 230,000 employees. Statistically, someone will always be doing something wrong.
missedthecue 5y ago
They paid $84M to the European regulator. The US regulator made them pay $1.9 Billion. https://www.reuters.com/article/us-hsbc-probe/hsbc-to-pay-1-9-billion-u-s-fine-in-money-laundering-case-idUSBRE8BA05M20121211 https://www.reuters.com/article/us-hsbc-probe/hsbc-to-pay-1-...

PragmaticPulp 5y ago

Where is the $100 million going to come from? Do they have that much money to spare? Or are their customers about to take a haircut? On that topic, where does BlockFi's profit come from? They're offering 9% (previously 12%) interest on deposits. Are they really re-loaning that money to other people at the 20-30% interest rate required to produce those returns (high interest rates come with high default rates, so you need to overshoot your target by a lot to make up for defaults).

tcgv 5y ago
Not sure how BlockFi works exactly but most lending DeFi apps have really high collateral requirements and liquidate positions in case of violation of collateral requirements charging a penalty to close open positions early and ensure protocol assets are preserved before a "default" event can ever happen. They're not really "capital efficient".
- xur17 5y ago
  If you have some time, this [0] is a pretty good write up of a number of different cefi lending platforms. The part I find most interesting is that most places lend to Genesis Trading to generate most of their return, in some cases also lending out smaller portions themselves. [0] https://prohashing.com/guides/earning-interest-on-crypto https://prohashing.com/guides/earning-interest-on-crypto
AJ007 5y ago
I think a lot of these yields from “crypto” are on paper, and it’s misleading the “defi” operators and their investors in to thinking they have huge returns. That’s the only way that would systematically explain lending tokens at very high interest rates.
- e4e78a06 5y ago
  They're primarily lending to institutional customers (hedge funds, HFT's). If you look on DeFi markets borrowing a couple billion dollars is going to cost you a lot more than the 10% BlockFi is probably charging, due to how automated lending mechanisms work. The reason the yield is so high is because there's insufficient liquidity in ETH/BTC/stablecoins. Notice also that these loans are undercollateralized. DeFi lending requires overcollateralization which often is not appealing to HFT's executing low-risk arbitrage trades that make a few bps of profit. They need big leverage to make decent money. In our normal financial system banks are willing to lend them money, but in DeFi nobody does undercollateralized loans.

jonathan-adly 5y ago

1. This is a PR win for the SEC. It can now go to congress and say, see, we are working with Crypto companies! (while they really aren't, not in good faith anyway). 2. This is a win for Blockfi. Like other mentions, they gave their business a legal veneer for the sum for $100m. If you are of the opinion that all Cryptos and related companies are scams. Guess what? The SEC disagrees. 3. The same product (even better actually) is done via DeFi. That's where the real battle will be with major implications on the Ethereum ecosystem (or whatever Dapp blockchain you prefer).

babyshake 5y ago
> The same product (even better actually) is done via DeFi. That's where the real battle will be with major implications on the Ethereum ecosystem (or whatever Dapp blockchain you prefer). The US gov could require teams based in the US to require KYC in their apps for US citizens. And they can require US citizens to only use apps with KYC. But can they really do much beyond that?
- jonathan-adly 5y ago
  That would be in violation of the securities laws that blockfi is accused of violating. Per this case, the SEC stand is interest bearing crypto -> a security
ProjectArcturis 5y ago
Definitely not a win for BlockFi. Definitely not an endorsement of crypto by the SEC. As part of the settlement, BlockFi had to agree to stop doing all that illegal stuff. "To settle the SEC’s charges, BlockFi agreed to pay a $50 million penalty, cease its unregistered offers and sales of the lending product, BlockFi Interest Accounts (BIAs), and attempt to bring its business within the provisions of the Investment Company Act within 60 days."
- managerclass 5y ago
  > BlockFi had to agree to stop doing all that illegal stuff Have they though? From Blockfi: "As part of the resolution, existing U.S. BlockFi Interest Account (BIA) clients will maintain their accounts and receive interest as they always have, but cannot add new assets to their accounts as of today, February 14, 2022. Further, U.S. persons will not be able to open new BIAs. Following completion of the SEC registration process for BlockFi Yield, BIAs of U.S. clients will be exchanged for BlockFi Yield, unless a client instructs BlockFi otherwise. BIAs of BlockFi clients outside of the U.S. are not subject to today’s resolution." Sounds like existing accounts can continue to function and accrue interest but no addition new users or assets can be deposited until they get SEC approval.

Animats 5y ago

Basically, the Investment Act of 1934 says: 1. You have to file a prospectus (an S-1) before collecting money. 2. You have to disclose a lot of stuff, like who's really behind this, where the money goes, what the risks are, what's happened so far, and what the business plan is. 3. Lying in an S-1 is a crime. Crypto schemes tend to violate 1), because 2) would show that their scheme is a scam, and if they tried to cover that up, 3) would put them in jail. There's grumbling about "paperwork", but that's just an excuse. It's the part about having to disclose all that stuff under penalty of perjury that scammers hate.

nikanj 5y ago
Luckily they can run the whole scheme from Elbonia, and people are more than happy to send over cryptos from the US.
- numtel 5y ago
  Well, there is Nexo which is basically the same but headquartered in Bulgaria.
- cuteboy19 5y ago
  That's almost exactly how Tether (USDT) works. Except instead of Elbonia we have the Caymans
  - altairprime 5y ago
    Note that Tether moving to the Caymans inspired the UK finregs to investigate the UK accounting company that’s now running Tether’s books, so I wouldn’t consider the Caymans to be a successful escape yet: https://www.ft.com/content/e86f8d72-918c-4a80-a4bf-de3110316076 https://www.ft.com/content/e86f8d72-918c-4a80-a4bf-de3110316...
thebean11 5y ago
Is BlockFi a scam though? Fraud is not what they are getting fined for, and it sounds like they can continue to operate if they meet these reporting requirements, and that the company intends to do that.

5350-uiop-1130 5y ago

I've had trouble finding clear jargon-free sources to explain how these lending platforms and various defi lending platforms generate yield. As far as I can tell it mostly works by token inflation. Celsius, Nexo tokens, Compound and Aave tokens for example. But these tokens are given as a reward to yield farmers so there is a huge sell pressure and yet I don't understand who is on the buy side. Why would you buy these reward tokens. It seems strange to me.

SilasX 5y ago
I can answer that, since I'm using Compound (and Uniswap). To start with, they lend out at interest, which is paid by users, for the same reason anyone would take a collateral-backed loan, knowing they'll have to pay interest. It could be speculation on sh-tcoins, investment in stocks, whatever. The Compound contract doesn't care because they're more-than-fully backed and have a mechanism for liquidation at a profit if the loan/collateral value ratio gets too high. A fraction of that is then paid to depositors (whether or not they're borrowing against said deposits). In some cases there are tax advantages in that you can avoid selling crypto while converting it into a different asset you'd prefer to invest in.[1] They also allocate Compound tokens (COMP) to depositors and borrowers (that's the distribution yield figure you see). While COMP's value is highly speculative, its grounding (for whatever that's worth) comes from the fact that the tokens entitle you to vote on changes to the Compound contract[2], which some people apparently value and are willing to pay for. You also need a minimum number of tokens (100,000 IIRC) to submit proposals. I don't know their process for deciding the distribution yield, but it sometimes leads to weird situations where it's higher than the interest rates for borrowing, meaning that (modulo fluctuations in the rates and value of COMP) you're being paid to borrow it. See, for example, the yields on Basic Attention Token (BAT) [3] -- 10.23% dist yield vs 3.84% borrow rate. As things stand now the interest on borrowing ETH is about the same as its borrowing distribution yield, meaning you can effectively borrow for free (again, modulo those fluctuations). I starting doing that to convert BTC to ETH that I use in Uniswap liquidity pools, which make money as automated market makers, taking a cut of conversions between cryptocurrencies. [1] Though, until the IRS clarifies, it's an open question whether putting up your crypto on Compound etc for these loans is a taxable event, as it's booked on the blockchain as conversion of e.g. Ethereum (ETH) to Compound Ethereum (cETH). I think that it should (obviously) have the same tax consequences as taking a loan at a pawn shop with your gold chains as collateral (i.e. there's no sale unless/until you default on the loan, in which case you have sold it for whatever amount they lent you that hasn't been paid back). [2] https://app.compound.finance/#vote https://app.compound.finance/#vote [3] https://compound.finance/markets/BAT https://compound.finance/markets/BAT

yrral 5y ago

Here is SEC commissioner Hester Peirce's dissenting opinion: https://www.sec.gov/news/statement/peirce-blockfi-20220214 https://www.sec.gov/news/statement/peirce-blockfi-20220214 Essentially she says that while they did misrepresent the over collateralization, a 100m fine is too much since they did fulfill their end of the loans. Additionally, she says that the categorization this stuff as securities is not effective. US consumers want interest on their crypto-assets now, but with companies having to jump through complicated SEC hoops this type of product will not be available in the near future (or maybe never available); not because of "customer protection" issues but because of sec over-regulation issues.

chernevik 5y ago
BlockFi has already blown its chance to provide full and reliable information on its own. The complaint here isn't that BlockFi made full disclosure but just forgot to check the S-1 box. The disclosures they have made were _false_. They wouldn't be paying $100mm otherwise. And it doesn't matter whether BlockFi has paid its loans so far. If misrepresentation of collateralization is penalized only when loans aren't paid, then it can never be penalized at all. I can easily believe that US accounting practices have problems with crypto; do we even have GAAP for this stuff? And it's easy to complain that SEC filings are complex and time-consuming. But at the end of the day there must be some sort of accounting of how these companies and products work. I suspect that a lot of crypto products won't meet SEC disclosure requirements because they can't meet any real disclosure requirement. And if that's right, then no, they shouldn't be available.
kkielhofner 5y ago
In the rotating door that is regulators and the industries they regulate she’s going to end up at a crypto company.
Comevius 5y ago
She always gives a partisan, anti-regulation opinion in these. She says that cryptocurrencies need new rules, but she never elaborates. She wants to keep the barrier of entry low while having meaningful protection for customers. Without regulation or oversight. How? Nobody knows. She doesn't either.

rr808 5y ago

Now you know why traditional payment processors are so expensive. You have to pay the fines + you need to pay for the armies of people to do the extra paperwork.

MisterBastahrd 5y ago

P1: Would you like to buy this banana? P2: That's an apple. P1: No, it's a banana. P2: Dude, that's clearly an apple. P1: Okay, it's an apple, but by pretending it's yellow and long, we're bypassing the rules for selling apples. P2: That's not.... that's now how any of this works

deleted 5y ago

[deleted]

AviationAtom 5y ago

I had a hunch some action of this sort was coming down the pipeline. The problem is that so many of these companies give the appearance of being fully law-abiding companies, but there isn't necessarily an easy to check that. I found it somewhat alarming that people proclaimed that 9% APY interest could be made, in such a way that it implied no risk, in much the same way cash in an FDIC-insured bank account is well-protected. I think much of this is moving so fast that it's going to take some time before the offerings really come close to offering the same level of safety one finds with an FDIC-insured bank account.

exabrial 5y ago

What irritates me about this is it has to be sold as a "security" and a crypto bank account is completely out of the question. If you're putting your money in your bank, and they're loaning it out, is that now a security?