BlockFi Lending LLC, a digital-asset financial services company, agreed to a $50 million settlement that affects more than 1,699 Arkansas residents, the Arkansas Securities Department announced Tuesday. BlockFi agreed to work with the ASD to settle offers and sales of unregistered securities in the form of interest-bearing digital asset deposit accounts called BlockFi Interest Accounts (BIA) to Arkansas residents.
As of December 31, 2021, BlockFi had 407,030 BIA investors in the US, with more than 1,699 in Arkansas.
BlockFi agreed to pay $50 million to the 53 North American Securities Administrators Association member agencies and $50 million to the Securities and Exchange Commission (SEC). After executing the appropriate consent orders, the 53 NASAA-member agencies will share equally in their half of the settlement, with each receiving $943,396.22.
The ASD is one of 32 NASAA-member agencies that have already agreed to work with BlockFi to settle and more jurisdictions are expected to follow.
BlockFi’s agreement to enter a settlement with the ASD comes amidst rising concerns over the proliferation of “decentralized” and digital asset-based financial products and services targeting retail investors. Many of these products and services are like traditional financial services offered by banks and brokerages but without any of the regulatory safeguards provided by registered firms and products.
For example, registered firms must truthfully disclose all known material facts and explain the risks associated with their investments, while the Federal Deposit Insurance Corporation, National Credit Union Administration, and the Securities Investor Protection Corporation insure depositors and investors against certain kinds of losses. Financial service firms operating in innovative fintech markets may not be complying with important laws that protect retail clients, and investors may not have access to the information necessary to conduct due diligence and make fully informed decisions.
“State securities regulators recognize the value new technology brings to financial markets. Complying with existing laws and regulations promotes competitive capital markets and continued investor protection,” said Arkansas Securities Commissioner Eric P. Munson. “This collaborative action sets an example for other firms providing digital asset financial products and services of how to work toward complying with securities laws in Arkansas.”
Effective immediately, BlockFi will stop offering its BIAs to the public. BlockFi’s parent company, BlockFi Inc., represented it intends to file with state and federal regulators to offer and sell a new product called BlockFi Yield.
As part of the settlement terms, BlockFi will cease allowing new investments in the BIAs until its securities are properly registered. BlockFi may continue to deploy digital assets for existing BIA investors and may continue to pay interest.
Between Feb. 14 and the date BlockFi’s securities are registered and qualified or permitted for sale with the states and SEC, current investors may keep their existing investments with BlockFi and will continue to earn interest under their initial agreement with the company. This measure is designed to protect the interests of existing investors while allowing BlockFi time to bring itself into compliance with state and federal law.
The ASD is continuing to consider enforcement actions against firms that fail to comply with state law. Firms that need to register and deal with past unregistered activity should contact their state and federal regulators. Investors are encouraged to contact the Arkansas Securities Department with questions about any investment opportunity or the persons offering it for sale before investing in the product.