Dive Brief:

• Cryptocurrency platform BlockFi will pay $100 million to the Securities and Exchange Commission (SEC) and 32 state regulators in a settlement announced Monday in which the company agreed to stop selling interest-bearing account products in the U.S.

• The federal regulator charged the company with failing to register offers and sales of its BlockFi Interest Accounts. The product last summer drew cease-and-desist orders from at least two state regulators and questions from several more. BlockFi's parent company intends to register under the Securities Act of 1933 and sell a new lending product, the SEC said in its statement Monday.

• "We have been in productive ongoing dialogue with regulators at the federal and state level. We do not comment on market rumors," BlockFi spokesperson Madelyn McHugh told Bloomberg, which reported the impending settlement last week. "We can confirm that clients’ assets are safeguarded on the BlockFi platform and BlockFi Interest Account clients will continue to earn crypto interest as they always have."

Dive Insight:

Under the agreement, BlockFi will pay the SEC a $50 million penalty. The other $50 million will be split among the states. The company agreed to stop making unregistered offers and sales of the interest-bearing product and align itself to the tenets of the 1940 Investment Company Act within 60 days. 

Over the past few months, the SEC has ramped up its efforts to police interest-bearing accounts. However, one gripe among companies that have found themselves in the agency's cross-hairs, is that the regulator uses near-90-year-old case law to justify its actions.

“Laws drafted in the 1930s to facilitate effective oversight of our financial system could not contemplate this technological revolution,” Coinbase wrote in an October policy statement. “Forcing the full spectrum of digital assets into supervisory categories codified before the use of computers risks stifling the development of this transformational technology, thus pushing offshore the innovative center of gravity that currently sits in the United States.” 

A month earlier, the company's CEO, Brian Armstrong, accused the SEC of "engaging in intimidation tactics behind closed doors." Another executive said the regulator threatened to sue Coinbase if it followed through on a plan to launch an interest-yielding product called Lend. The company scrapped the product but maintained that Lend would not have been a security because it wouldn't have represented an investment contract.

SEC Chair Gary Gensler on Monday said the BlockFi settlement "makes clear that crypto markets must comply with time-tested securities laws. It further demonstrates the Commission’s willingness to work with crypto platforms to determine how they can come into compliance with those laws."

BlockFi sold the interest-bearing accounts to the public for nearly three years. The SEC found the products to be securities, and that the company failed to register with the SEC or qualify for an exemption. 

The regulator also found BlockFi operated for more than 18 months as an unregistered investment company because it issued securities and held more than 40% of its total assets, excluding cash, in investment securities, including loans of crypto assets to institutional borrowers. 

Further, the company made a false and misleading statement on its website for more than two years concerning the level of risk in its loan portfolio and lending activity, the SEC said.

BlockFi neither admitted nor denied the findings.

'Land grab'?

Coinbase has long said the SEC refuses to give the digital asset industry an opinion in writing as to what products should be allowed and why — asserting the tactic as a "land grab" by the regulator.

Some Republican lawmakers have indirectly accused the SEC of reaching outside its lane. Gensler, in a September hearing, told lawmakers, “We just don’t have enough investor protection in crypto finance, issuance, trading or lending,” likening the space to “the Wild West or the old world of ‘buyer beware’ that existed before the securities laws were enacted.”

“As to the people and the companies that you regulate as chairman of the SEC, do you consider yourself to be their daddy?” Sen. John Kennedy, R-LA, asked Gensler at the hearing.

The long-running issue is whether or how interest-bearing accounts qualify as securities. A 1946 Supreme Court case determined that an investment contract, by the Securities Act's standard, is one in which "a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party."

In the case, which established the "Howey test," investors bought rows of orange trees in Florida and agreed to let the Howey Company manage the trees, harvest and sell the fruit, and give investors a share of the proceeds. By that measure, a Bloomberg op-ed writer said in July, the oranges, trees and land are not securities, but the agreement is.

BlockFi and Coinbase are not the only alleged targets. Digital-asset lender Celsius, along with crypto firms Gemini and Voyager Digital, have found themselves subject to similar SEC scrutiny, Bloomberg reported last month. Some of the same states that questioned BlockFi's interest-bearing accounts sought similar restrictions against Celsius products.

A Gemini spokeswoman last month told the wire service the company was cooperating with an “industry-wide inquiry” into interest-bearing accounts. Celsius said it was working with regulators to “operate in full compliance with the law.” A Voyager spokesman said such ongoing communications with government agencies are routine.