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N.J. Regulator Orders BlockFi to Stop Opening New Accounts

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What You Need to Know

  • New Jersey Bureau of Securities said the firm's high-yielding BlockFi Interest Accounts are unregistered securities.
  • BlockFi's founder and CEO Zac Prince says they are not securities and the firm remains operational for existing clients.
  • The regulator ordered BlockFi to stop selling any non-registered non-exempt securities in New Jersey.

The New Jersey Bureau of Securities has issued a cease and desist order to stop BlockFi, a bank-like crypto platform, from selling unregistered securities in the form of interest-earning cryptocurrencies accounts.

“Our rules are simple: If you sell securities in New Jersey, you need to comply with New Jersey’s securities laws,” said Acting Attorney General Andrew Bruck in a statement. “Our Bureau of Securities will be monitoring this issue closely as we work to protect investors.”

The order from the Bureau of Securities, a division of the attorney general’s office, states that  BlockFi, through its affiliates BlockFi Lending LLC and BlockFi Trading LLC, has been funding its lending operations and proprietary trading in part through the sale of unregistered securities, called BlockFi Interest Accounts (BIAs), in cryptocurrency interest-earning accounts.

BlockFi lets investors purchase BIAs by depositing certain eligible cryptocurrencies, including Bitcoin and Ether, into accounts, then pools those cryptocurrencies to fund its lending operations and proprietary trading, taking control over the cryptocurrencies to use them as it sees fit, according to the New Jersey order.

In exchange, investors “are promised an attractive interest rate”— as high as 7.5% — paid monthly in cryptocurrency, based on the amount of cryptocurrencies in their account. They are not told that “its BIA product is not currently registered by federal or state securities regulatory authorities, even though the BIA is a ‘security’ and should be registered as such,” according to the New Jersey order.

As of March 31, 2021, BlockFi held the equivalent of $14.7 billion from the sale of these unregistered securities in violation of the Securities Law, according to the Bureau of Securities order. It ordered the company, which is registered in Delaware but has offices in Jersey City, New Jersey, to “cease and desist from offering for sale any security, including any BIA, to or from New Jersey unless the security is registered with the Bureau, is a covered security, or is exempt from registration under the Securities Law” as of July 22. It also ordered the firm to not violate any other provisions of the Securities Law and any rules pertaining to securities sales in New Jersey.

The order notes, however, that the firm can continue to pay interest on existing BIAs and refund principal to BIA investors consistent with the BIA and BlockFi terms and conditions.

In response, BlockFi’s founder and CEO Zac Prince tweeted that “BIA is not a security, and we therefore disagree with the action by the New Jersey Bureau of Securities.” He said BlockFi remains “fully operational” for all its existing clients and “all aspects of the BlockFi platform will continue to be accessible to our clients in New Jersey, noting that the order  calls for the company to stop accepting new BIA clients residing in New Jersey beginning July 22.

He said BlockFi “is engaged in an ongoing dialogue with regulators to help them understand our products, which we believe are lawful and appropriate for crypto market participants.”

BlockFi has up to 15 days to respond to the New Jersey order in writing and request a hearing.