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Last week, the Iowa Department of Insurance issued a consent order against BlockFi Lending LLC (BlockFi). The consent order joins Alabama, New Jersey, Kentucky, Texas and the Securities and Exchange Commission (SEC) in taking action against the firm. According to the Iowa order, it was issued after BlockFi Interest Accounts (BIA) were found to be an unregistered securities product. BIA involved users lending their cryptoassets to BlockFi, which would then reward them with variable monthly interest.
The order is part of an ongoing multi-state investigation into the company by the SEC and members of the North American Securities Administrators Association (NASAA) – made up of regulators in 53 jurisdictions as a result of alleged securities violations by BlockFi.
According to the consent order: “BlockFi offered and sold securities in Iowa that were not registered or permitted to be sold in Iowa, and offered and sold securities in Iowa without registering as a broker-dealer or agent. BlockFi was ordered to pay an administrative penalty in the amount of $943,396.22 and to cease and desist from any misrepresentation of material fact in connection with the securities.” This fine is in addition to the $100 million fine BlockFi paid to the SEC back in February for unregistered interest-bearing accounts and for violating the registration provisions of the Investment Company Act of 1940.
Furthermore, Iowa’s consent order also alleges “misrepresentations and omissions about the level of risk in its loan portfolio that did not allow investors to have complete and accurate information to assess the risk of their investments. Specifically, BlockFi has stated in multiple postings on its website that its institutional loans are “typically” over-collateralized, when in fact most loans are not.
In total, 24% of institutional digital asset loans made by BlockFi in 2019, 16% of those in 2020 and 17% in the first half of 2021 were oversecured. BlockFi’s statements that its loans are “typically” over-collateralized suggest to investors that they have secured more protection against default than BlockFi has actually secured.
Companies face increasing pressure from regulatory uncertainty and arbitrage resulting from the complex and opaque nature of the US regulatory regime for cryptoassets, products and services. While the SEC’s initial charges against BlockFi in February were “the first of their kind,” BlockFi certainly won’t be the last company to find itself in a similar situation.
This is especially the case as the SEC is rapidly expanding and hiring for positions within their Crypto Assets and Cyber Unit in the agency’s Enforcement Division. Now, more than ever, it is critical that companies understand their regulatory obligations and obligations to the appropriate regulatory bodies.
A law firm issues a restraining order through NFT
Speaking of a “first of its kind” action taken in the cryptoasset enforcement space, Holland & Knight has just issued the first ever Temporary Restraining Order (TRO) through a non-fungible token (NFT). A unique TRO NFT was issued by the law firm’s asset recovery team.
They minted the NFT before handing it over to an anonymous crypto hacker who stole more than $8 million in Ether and USDC from FinTech company LCX back in January. These funds were stolen via exploited hot wallets and laundered using Tornado Cash. Despite this, the funds were successfully traced through blockchain analytics and forensics – allowing the hackers to serve.
According to a statement released by the Liechtenstein-based FinTech company: “LCX’s attorneys Holland & Knight and Bluestone, PC, have achieved a historic first event that has major repercussions for the cryptocurrency markets. They successfully served a temporary restraining order (TRO) against a defendant in a hacking case through NFT, which they call a “utility token” or “service NFT.”
This innovative method of providing services to an anonymous defendant has been approved by the New York Supreme Court and is an example of how innovation can provide legitimacy and transparency to a market that some believe is unmanageable. The on-chain process served by the NFT service is publicly available on the Ethereum blockchain.
This innovative form of legal process may spark a trend in other law enforcement agencies and firms exploiting the digital nature of cryptoassets to seek retribution and punishment when rules are broken by “anonymous” or “pseudonymous” bad actors and criminals.
CFTC files suit against Gemini
This month, the Commodity Futures Trading Commission (CFTC) filed a lawsuit against Gemini Trust Company (Gemini) in the US District Court for the Southern District of New York. According to a statement released by the CFTC, the complaint against the crypto company founded by the Winklevoss twins arose as a result of them “making false or misleading statements of material facts or failing to disclose material facts to the CFTC in connection with the self-certification bitcoin futures products. The CFTC seeks disgorgement of ill-gotten gains, civil penalties, registration and trading injunctions, and an injunction against further violations of the Commodity Exchange Act (CEA), as charged.”
Incorrect or false facts were part of the company’s 2017 assessment of the potential self-validation of Bitcoin (BTC) futures contracts by a designated contract market (DCM). The BTC futures contract would be settled against the spot price of Bitcoin on the relevant day, as determined by an auction held on Gemini’s digital asset trading platform (Gemini Bitcoin Auction). The CFTC complaint continues to state that “the facts are relevant to an understanding of whether the proposed Bitcoin futures contract would be easily susceptible to manipulation.
As the complaint states: “Gemini personnel knew or reasonably should have known that such statements were false or misleading.” While not necessarily related, the company is under additional pressure as crypto market conditions (and broader market conditions) continue to deteriorate. For Gemini, this resulted in the company’s decision to lay off 10% of its total workforce on the same day the CFTC filed its complaint. Gemini is not the only company that has decided to reduce the number of employees; companies like Coinbase and crypto.com have also decided to do the same.
Thai SEC revokes Huobi’s license
The Securities and Exchange Commission of Thailand has revoked Huobi Thailand’s license to operate a crypto exchange in the country. Despite only opening in 2020, Huobi’s services there have been suspended since September 2021. The move came after Thailand’s SEC cited non-compliance with rules and regulations expected of exchanges. Huobi was granted an extension to address some of these complaints. During that time, the company had to return certain funds to customers. Despite its “best efforts”, Huobi could not reach all of its customers. Now, Huobi Thailand will close permanently on July 1st.
A statement posted on the company’s website said: “Following the closing [the] Huobi Thailand platform, Huobi Thailand will no longer have any relationship or legal relationship with Huobi Group and its subsidiaries. Huobi Group and its affiliates are not and will not be responsible for any problems related to Huobi Thailand.” The issue ends with the words: “However, we regret our trip [has] come to the end, and we sincerely thank you for your long support.”
Regulation on compliance with the law
