Cryptocurrency
Despite BlockFi's $100M penalty, demand for crypto lending is here to stay
February 14, 2022
Crypto lending specialist BlockFi's $100 million penalty to settle regulators' allegations sets the bar for other blockchain-based financing startups that may come under scrutiny from the Securities and Exchange Commission.
Regulators alleged that BlockFi failed to register its lending product as an interest-bearing security. The New Jersey-based company offers a savings product that lets users lend out their digital currencies at a rate of up to 9.25%, which is substantially higher than that paid by traditional financial institutions.
"BlockFi has not been very transparent. I think that is part of the reason why [the] SEC went after them," said PitchBook fintech analyst Robert Le. “These are new products, so no one really knows what the real risks of these products look like.” Users don’t yet know whether or not they can lose their bitcoin and ethereum if they lend them out or if the product is 100% risk-free.
Regulators are also reportedly investigating the digital lending practices of Celsius, Gemini and Voyager Digital.
"Other providers could either register their products with the SEC, or they can try to fight it out in court," Le said. He predicts that Celsius, whose business is primarily based on crypto lending, will try to prove that these are not security products and therefore don't need to be registered with the SEC. Celsius raised a $750 million Series B at a valuation of around $3.5 billion in November.
Le noted that if the SEC doesn't approve these products and courts side with the decision, crypto lending could move to decentralized finance companies like Compound and MakerDAO. He added that companies like BlockFi and Celsius could also integrate DeFi products into their platforms on the back end. Under the DeFi protocols, the SEC cannot hold any single centralized party like BlockFi responsible, Le said.
"I think these products will exist just because there's a lot of consumer demand for them," Le said. "We just don't know if it is going to be regulated, unregulated or a combination of both."
BlockFi said in a statement that it plans to register its high-yield crypto savings offering with the SEC. In the meantime, existing US-based clients will continue to earn interest but can't add new assets.
The company raised $850 million across two rounds last year backed by investors including Bain Capital, Tiger Global and partners of DST Global and was last valued at $4.75 billion in July, according to PitchBook data.
Correction: A previous version of this article incorrectly stated that DST Global participated in BlockFi's Series D. The investment was made by partners of DST Global, not DST Global itself.
Featured image by Namthip Muanthongthae/Getty Images
Regulators alleged that BlockFi failed to register its lending product as an interest-bearing security. The New Jersey-based company offers a savings product that lets users lend out their digital currencies at a rate of up to 9.25%, which is substantially higher than that paid by traditional financial institutions.
"BlockFi has not been very transparent. I think that is part of the reason why [the] SEC went after them," said PitchBook fintech analyst Robert Le. “These are new products, so no one really knows what the real risks of these products look like.” Users don’t yet know whether or not they can lose their bitcoin and ethereum if they lend them out or if the product is 100% risk-free.
Regulators are also reportedly investigating the digital lending practices of Celsius, Gemini and Voyager Digital.
"Other providers could either register their products with the SEC, or they can try to fight it out in court," Le said. He predicts that Celsius, whose business is primarily based on crypto lending, will try to prove that these are not security products and therefore don't need to be registered with the SEC. Celsius raised a $750 million Series B at a valuation of around $3.5 billion in November.
Le noted that if the SEC doesn't approve these products and courts side with the decision, crypto lending could move to decentralized finance companies like Compound and MakerDAO. He added that companies like BlockFi and Celsius could also integrate DeFi products into their platforms on the back end. Under the DeFi protocols, the SEC cannot hold any single centralized party like BlockFi responsible, Le said.
"I think these products will exist just because there's a lot of consumer demand for them," Le said. "We just don't know if it is going to be regulated, unregulated or a combination of both."
BlockFi said in a statement that it plans to register its high-yield crypto savings offering with the SEC. In the meantime, existing US-based clients will continue to earn interest but can't add new assets.
The company raised $850 million across two rounds last year backed by investors including Bain Capital, Tiger Global and partners of DST Global and was last valued at $4.75 billion in July, according to PitchBook data.
Correction: A previous version of this article incorrectly stated that DST Global participated in BlockFi's Series D. The investment was made by partners of DST Global, not DST Global itself.
Featured image by Namthip Muanthongthae/Getty Images
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