Bitcoin is trading below $30,000 again as another cryptocurrency company runs into regulatory trouble – the latest headwind to hit the digital asset market.
The New Jersey Bureau of Securities has issued a ban to order against BlockFi, a crypto trading and lending firm, which is demanding that it stop offering interest-bearing accounts and taking on new customers in New Jersey from Thursday.
BlockFi has partially funded its trading and lending activities “by selling unregistered securities in violation of the Securities Act,” state Attorney General Andrew Bruck said in a press release. “Nobody gets a free pass because they operate in the rapidly evolving cryptocurrency market.”
BlockFi CEO Zac Prince said in a tweet that his accounts are “lawful and appropriate for crypto market participants.” He added that a BlockFi interest-bearing account is not a security. BlockFi will remain fully operational for existing New Jersey customers, he added.
“We will continue to work with all relevant authorities to protect the interests of our customers and ensure our products remain available,” he said.
The state’s order is targeting BlockFi’s high-yielding crypto accounts. Investors can buy a currency like Bitcoin and deposit it into a BlockFi account where it earns interest, paid monthly in crypto, well above the returns on traditional bank or brokerage deposits. BlockFi pools the deposits to fund its lending activities 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 returns: USD Coin (USDC) pays 7.5%, while MakerDao (DAI) is 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 are not registered as securities or bank accounts under state law, nor are they exempt from regulation, New Jersey officials said. While BlockFi says it is a regulated entity, it has not disclosed that its accounts have not been registered, in violation of the state’s disclosure rules, per the state’s order.
Unlike bank or brokerage accounts, which are insured up to $250,000 by the Federal Deposit Insurance Corp., or up to $500,000 by the Securities Investor Protection Corp., crypto accounts may not have such protection. BlockFi does not offer its accounts to residents of New York State and those in other states, New Jersey officials said, “presumably because of the laws in those jurisdictions.”
The broader thrust is that regulators may be targeting such high-yield crypto accounts and the broader sphere of decentralized financial or DeFi platforms.
These networks are spreading in the financial and technical sectors. DeFi uses blockchain technology to create platforms and applications for digital tokens and transactions. It is a rapidly growing field, including exchanges, stablecoins, and lending platforms such as BlockFi. Dozens of new digital tokens are appearing on DeFi networks.
But regulatory oversight is a gray area. In New Jersey, the state now appears to see the high-yield crypto accounts as securities, which could make them subject to additional regulation and disclosure rules.
Many companies are now building DeFi platforms, focusing on crypto lending, trading, and other services.
(ticker: SQ) CEO Jack Dorsey tweeted last week that the company plans to build out a DeFi network, “to create non-custodial, permissionless and decentralized financial services.”
Grayscale Investments, one of the largest digital asset managers with $31 billion under management, launched a DeFi fund on July 14. Available to high net worth investors with a minimum investment of $50,000, the fund consists of a pool of digital tokens residing on various DeFi networks. The largest holding is a token called Uniswap, at 50% of the fund, followed by Compound, MakerDao and Synthetix Network.
Early investors may not be happy. The fund charges an annual management fee of 2.5% and is down 9.2% since launch last week.
Write to Daren Fonda at email@example.com