Bureau Steps Up to Protect Investors as New Financial Services Business Models Come Under Regulators’ Scrutiny
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NEWARK – Acting Attorney General Andrew J. Bruck today announced that the Bureau of Securities has issued a Summary Cease and Desist Order to stop a financial services company based in Jersey City from selling unregistered securities in the form of interest-earning cryptocurrency accounts that have raised at least $14.7 billion worldwide.
BlockFi, Inc. (“BlockFi”), through its affiliates BlockFi Lending, LLC (“BlockFi Lending”) and BlockFi Trading, LLC, has been funding its cryptocurrency lending operations and proprietary trading at least in part through the sale of unregistered securities in violation of the Securities Law, according to the Order the Bureau issued yesterday.
“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 Bruck. “No one gets a free pass simply because they’re operating in the fast-evolving cryptocurrency market. Our Bureau of Securities will be monitoring this issue closely as we work to protect investors.”
The Bureau’s action comes amid rising concerns over the proliferation of decentralized finance platforms like BlockFi that seek to reinvent traditional financial systems such as banks and brokerages for digital asset investors. Unlike traditional, regulated banks and brokerage firms, however, investors’ losses are not insured against or protected by the Federal Deposit Insurance Corporation or Securities Investor Protection Corporation. Further, these decentralized finance platforms, which are not currently registered or licensed, present a heightened risk of loss to investors.
“Cryptocurrency investment products offered and sold on decentralized finance platforms carry significant risks, even beyond those associated with the volatility of cryptocurrency,” said Kaitlin Caruso, Acting Director of the Division of Consumer Affairs. “Platforms like BlockFi may mirror the traditional financial structures that we know and trust, but in reality they can leave investors extremely vulnerable.”
BlockFi allows investors to purchase a BlockFi Interest Account by depositing certain eligible cryptocurrencies – including Bitcoin and Ethereum – into accounts at BlockFi. BlockFi then pools these cryptocurrency deposits together to fund its cryptocurrency lending operations and proprietary trading. In exchange for investing in the BlockFi Interest Accounts, investors are promised an attractive interest rate that is paid monthly in cryptocurrency.
The Order’s findings include that, despite advertising on its website that BlockFi is a ‘US regulated’ entity that ‘play(s) by the rules,’ BlockFi fails to disclose to investors that its BlockFi Interest Accounts are not registered with the Bureau or any other securities regulator, or exempt from registration.
The BlockFi website contains a “Disclosure and Complaints” page that advises dissatisfied investors to contact BlockFi’s Customer Service online before contacting their local jurisdiction to file a complaint. It then provides a list of state banking regulators and their contact information.
However, as stated in the Order, BlockFi fails to explain that state banking regulators such as the New Jersey Department of Banking and Insurance do not license the BlockFi Interest Accounts, or that complaints should instead be filed with the New Jersey Bureau of Securities because the BlockFi Interest Accounts are securities.
BlockFi already does not offer its interest-bearing accounts to residents of New York and certain other jurisdictions, presumably because of the laws in those jurisdictions.
“When it comes to cryptocurrency financial products, we urge investors to look beyond the promise of heightened returns and approach them with extreme caution,” said Bureau Chief Christopher W. Gerold. “As the online cryptocurrency-related investment market continues to evolve, the Bureau will continue to enforce the securities laws to safeguard the public.”
The Bureau’s investigation was handled by Deputy Chief Amy Kopleton and Investigator Delfin Rodriguez of the Bureau of Securities, within the Division of Consumer Affairs. The Bureau is represented by Assistant Attorney General Brian F. McDonough and Deputy Attorneys General Victoria A. Manning and Evan A. Showell, Section Chief and Assistant Section Chief, respectively, of the Securities Fraud Prosecution Section of the Division of Law within the Division of Law’s Affirmative Civil Enforcement Practice Group.
The Bureau is charged with protecting investors from investment fraud and regulating the securities industry in New Jersey. It is critical that investors “Check Before You Invest.” Investors can obtain information, including the registration status and disciplinary history, of any financial professional doing business to or from New Jersey, by contacting the Bureau toll-free within New Jersey at 1-866-I-Invest (1-866-446-8378) or from outside New Jersey at (973) 504-3600, or by visiting the Bureau’s website at www.NJSecurities.gov. Investors can also contact the Bureau for assistance, or to raise issues or complaints about New Jersey-based financial professionals or investments.