It is unfortunate that the United States Securities and Exchange Commission has chosen to send a message to the crypto industry by extracting a huge $
It is unfortunate that the United States Securities and Exchange Commission has chosen to send a message to the crypto industry by extracting a huge $100 million settlement from the lending platform BlockFi in an administrative proceeding publicly announced on Feb. 14. It was quite a Valentine’s Day kiss — $50 million for the SEC and $50 million for some 32 states that piled on because they saw an easy target.
Powers On… is a monthly opinion column from Marc Powers, who spent much of his 40-year legal career working with complex securities-related cases in the United States after a stint with the SEC. He is now an adjunct professor at Florida International University College of Law, where he teaches a course on “Blockchain & the Law.”
Don’t misunderstand: I agree with the SEC that as a part of its lending activity, BlockFi likely offered products that could be characterized as “securities” under their definition in the Securities Act of 1933 in Section 2(11). Regular Cointelegraph readers may recall me talking about a similar lending program planned by Coinbase that would likely be a “security” given that the loaned assets were all pooled together for lending purposes. The legal analysis by the SEC takes a somewhat different approach, with the lending program presented as both an “investment contract” and “note” under Section 2(11). Thus, the fact that the SEC commenced an action for that federal securities law infraction does not surprise me. What is somewhat troubling, though, is both the size of the penalty and the assertion that BlockFi operated as an unregistered investment company under the Investment Company Act of 1940.
Indeed, I am not the only one disturbed by this. SEC Commissioner Hester Peirce publicly dissented by way of issuing a “Statement on Settlement with BlockFi Lending LLC” the same day the SEC proceeding commenced. In the statement, she asks:
“Is the approach we are taking with crypto lending the best way to protect crypto lending customers? I do not think it is, so I respectfully dissent.”
Bravo to Commissioner Peirce! For both her fearless boldness in advocating for a more reasoned regulatory approach to advancing the nascent crypto industry and for her being, at this time, the sole shining beacon the industry can count on to question the knee-jerk reactionaries in government — reactionaries that care little about whether they throw the proverbial baby out with the bathwater.
The U.S. regulatory landscape
There was a time when “Crypto Mom” had at least one ally on the commission who, like her, sought to protect blockchain from over-regulation. Elad Roisman, a fellow Republican appointed by former President Donald Trump, joined Peirce in advocating for reasonable regulation for the industry. But he resigned from the SEC in January, having served for little more than three years as a commissioner. Peirce was nominated to the SEC by Trump and confirmed in January 2018, so she has one more year of her five-year term. Let’s all hope she is reappointed by President Joe Biden, as once she is gone from the SEC, the actions of Chair Gary Gensler will go unchecked, and we can expect many more efforts by him to, in the name of investor protection, impose disproportionate “telephone book” settlement numbers.
As I have previously written, Gensler is an aggressive government regulator, having demonstrated his tenacity in imposing regulation while at the Commodity Futures Trading Commission. His deep knowledge of blockchain and crypto, as demonstrated by having taught the subject at MIT, is both a blessing and a curse. While chair of the CFTC, he pushed through hundreds of rules and regulations to implement Dodd-Frank legislation, including regulating swaps transactions. He has spent the better part of the last 25 years in and out of the U.S. government, so he has political instincts. From his bio, it does not seem he has worked in the private sector since the mid-1990s.
In the SEC press release announcing the BlockFi settlement, Gensler states:
“It [the settlement] further demonstrates the Commission’s willingness to work with crypto platforms to determine how they can come into compliance with those laws [the Securities Act and Investment Company Act].”
Really? I don’t believe or accept that for one minute. How is a $100 million penalty showing the SEC’s “willingness to work with crypto platforms”? It seems to me that this is quite a significant financial penalty.
While I am not privy to how this settlement came about, I doubt very much that BlockFi, if and when it approached the SEC to discuss its compliance efforts, thought that by voluntarily coming forward and cooperating it would be hit with a $100 million settlement! Moreover, most startups are not in a position to fork over that spare change, and I think this settlement may deter them from cooperating and self-reporting.
The BlockFi settlement
In this…
cointelegraph.com