Bitcoin Is Falling Because High-Yielding Crypto Accounts Are in Regulators’ Crosshairs

BlockFi has been funding its trading and lending businesses, in part, “through the sale of unregistered securities in violation of the Securities Law,” the state’s attorney general, Andrew Bruck, said in a release. “No one gets a free pass simply because they’re operating in the fast-evolving cryptocurrency market.” 

BlockFi CEO Zac Prince said in a tweet that its accounts “are lawful and appropriate for crypto market participants.” He added that a BlockFi interest-bearing account isn’t a security. BlockFi remains fully operational for existing clients in New Jersey, he added.

“We will continue to engage with all relevant authorities to protect our clients’ interests and ensure that our products remain available,” he said.

The state’s order targets BlockFi’s high-yielding crypto accounts. Investors can buy a currency such as Bitcoin and deposit it in a BlockFi account where it earns interest, paid monthly in crypto, well above yields on traditional bank or brokerage deposits. BlockFi pools the deposits to fund its lending operations and proprietary trading.

BlockFi is now paying 4% on up to 0.25% of one Bitcoin (BTC), worth about $7,500 at recent prices of $29,875 for the token. Other tokens offer higher yields: USD Coin (USDC) pays 7.5% while MakerDao (DAI) is at 8%.

BlockFi has raised at least $14.7 billion worldwide through these accounts, according to the release, but the company may be in violation of state securities law. BlockFi’s accounts aren’t registered as securities or bank accounts under state law, nor are they exempt from regulation, New Jersey’s officials said. While BlockFi says it is a regulated entity, it hasn’t disclosed that its accounts aren’t registered, violating state disclosure rules, according to the state’s order.

Unlike bank or brokerage accounts, which are insured for up to $250,000 by the Federal Deposit Insurance Corp., or for up to $500,000 by the Securities Investor Protection Corp., crypto- accounts may have no such protections. BlockFi isn’t offering its accounts to New York state residents and those in other states, New Jersey’s officials pointed out, “presumably because of the laws in those jurisdictions.”

The broader thrust is that regulators may be homing in on such high-yielding crypto accounts and the broader sphere of decentralized finance, or DeFi, platforms.

Those networks are proliferating across the financial and tech sectors. DeFi uses blockchain technology to create platforms and applications for digital tokens and transactions. It is a rapidly expanding field, including exchanges, stablecoins, and lending platforms like BlockFi. Scores of new digital tokens are popping up on DeFi networks.

But regulatory supervision is a gray area. In New Jersey, the state now appears to view the high-yielding crypto accounts as securities, which could subject them to additional regulations and disclosure rules.

Many companies are now building DeFi platforms, aiming to get into crypto-lending, trading, and other services. Square (ticker: SQ) CEO Jack Dorsey tweeted last week that the company plans to build out a DeFi network, “to create non-custodial, permission-less, and decentralized financial service.”

Grayscale Investments, one of the largest digital asset managers with $31 billion under management, launched a DeFi fund on July 14. The fund, available to high-net-worth investors with a $50,000 minimum investment, consists of a pool of digital tokens running on various DeFi networks. Its largest holding is a token called Uniswap, at 50% of the fund, followed by Compound, MakerDao, and Synthetix Network.

Early investors may not be pleased. The fund is charging a 2.5% annual management fee, and It is down 9.2% since launching last week.

Write to Daren Fonda at [email protected]