On February 14, 2022, the Securities and Exchange Commission (“SEC”) issued an Investor Bulletin to warn and educate investors about the risks associated with interest-bearing crypto accounts. The SEC recently increased its focus on the digital asset space over the past several years as markets for digital assets have grown rapidly.
The Investor Bulletin’s first and most important warning is the lack of protection in interest-bearing accounts for crypto assets. For example, banks and credit unions are subject to state and federal regulations that are designed to limit risks to investors and consumers in the event of a bank or credit union’s insolvency. Crypto asset interest-bearing accounts do not have such regulations. Additionally, deposits made at banks and credit unions are insured by the Federal Deposit Insurance Corporation (“FDIC”) and National Credit Union Administration (“NCUA”). This insurance protects customer deposits up to a certain amount in the event of a bank or credit union’s insolvency. Crypto asset interest-bearing accounts do not afford such protection.
Secondly, the Investor Bulletin outlines the risks associated with crypto asset investments, such as violations of securities laws. On the day the Investor Bulletin was issued, the SEC charged BlockFi Lending LLC with failing to register the offers and sales of its retail crypto lending product. As part of a settlement agreement, BlockFi agreed to pay a $50 million civil money penalty to settle the SEC’s charges. The SEC Chair Gary Gensler said, “Today’s settlement makes clear that crypto markets must comply with time-tested securities laws, such as the Securities Act of 1933 and the Investment Company Act of 1940.” In similar action, BlockFi agreed to pay an additional $50 million in fines to 32 states to settle similar charges.
While the SEC penalty is undoubtedly substantial, it is relatively a small fraction of the capital BlockFi holds in BlockFi Interest Accounts (“BIA”) investor assets. “As of March 31, 2021, BlockFi and its affiliates held approximately $14.7 billion in BIA investor assets.” As of December 8, 2021, BlockFi and its affiliates held approximately $10.4 billion in BIA investor assets, and had approximately 572,160 BIA investors, including 391,105 investors in the United States.” BlockFi has agreed to cease offering and selling BIAs in the United States.
As the SEC and other regulatory bodies continue to focus on the digital assets space, it is crucial for investors engaged in digital asset transactions to pay attention to updates from relevant government agencies and review all related documents to better understand the risks associated with such transactions. Companies and investors in the digital assets space should consider all applicable federal and state laws when conducting activities related to digital assets.
For more information regarding the SEC’s Investor Bulletin or interest-bearing crypto accounts, please contact our Emerging Cyber Technologies Group.
Flora Dellishad, JD/MBA Candidate 2023, Duquesne University School of Law, contributed to the research and drafting of this article.
Leech Tishman’s Facebook Page: https://www.facebook.com/leechtishman
Leech Tishman’s Twitter: https://twitter.com/LeechTishman
Leech Tishman’s Company Page on LinkedIn: https://www.linkedin.com/company/leech-tishman
Leech Tishman Fuscaldo & Lampl is a full-service law firm dedicated to assisting individuals, businesses, and institutions. Leech Tishman offers legal services in business restructuring & insolvency, corporate matters, employment & labor, estates & trusts, intellectual property, litigation & alternative dispute resolution, and real estate. In addition, the firm offers a wide range of legal services to clients in the aviation & aerospace, cannabis, construction, emerging cyber technologies, energy & natural resources, healthcare, and hospitality industries. Headquartered in Pittsburgh, PA, Leech Tishman also has offices in Chicago, Los Angeles, New York, Philadelphia, Sarasota, and Washington, D.C.