Though the company had to pay a US$100 million settlement, it is a legitimate company with a weak grasp on regulatory requirements.
Recently, financial services startup BlockFi came under fire for failing to properly register its services—more specifically, the BlockFi Interest Accounts—as securities. The company had to pay US$100 million as a settlement with the U.S. Securities and Exchange Commission (SEC). Launched in 2017, this U.S.-based company gained popularity for providing high-interest loans to its users. In an interview, the company’s CEO and Founder, Zac Prince, dubbed their “Interest Accounts” as their “one of their most popular products” that offers high yields on cryptocurrencies and stable coins. Using this product, users would lend digital assets and earn interest. As of February 14, 2022, following the settlement, the BlockFi Interest Accounts (BIA) have been made unavailable to new clients from the United States.
In response to the settlement, Prince highlighted: one, it’s neither an admit nor deny settlement; and two, the settlement very clearly lays out a path to registration of a crypto interest-bearing security. He feels that this case helps shed some light on the need for regulatory clarity in the crypto industry.
This incident also gave rise to questions, such as what exactly does BlockFi do and is it, in fact, a legitimate company? Let’s find out.
What is BlockFi?
BlockFi is a cryptocurrency exchange and financial services provider backed by financial companies, including Coinbase, SoFi, Fidelity and more. With around 800 employees and four-and-a-half years in the business, BlockFi became famous for helping advanced traders earn high yields on their investments. It charges no fees for trading cryptocurrencies and boasts over US$10 billion in assets. However, there is a withdrawal fee, and withdrawals are very slow on the platform.
The company started out as a lending firm which served as a bridge between various cryptocurrencies and fiat currencies. By offering high-yielding interest accounts, the BlockFi platform aims to incentivize users to lend their digital assets. In essence, this is how the company helps investors make money from cryptos—by lending their cryptocurrencies and earning interest on these investments through BlockFi Interest Accounts.
How does BlockFi work?
Using BlockFi, people can trade cryptocurrencies, though there are not many to choose from. Yet, that’s not a deterrent for people to use the platform, given that its unique value proposition (UVP) is its lending facilities. Investors put money into the platform that is lent to other people and crypto startups, also referred to as “borrowers”, based on the collateral they can offer. It’s a good way for investors to get involved in other businesses and for startups to gain capital. Borrowers, then, are required to pay back the money with an interest, which is how BlockFi makes money. The interest earned is divided between the platform and the investors.
Ultimately, BlockFi makes money through interest fees, withdrawal fees, mining and other premiums. Presently, the company has also introduced a cryptocurrency credit card—the BlockFi Rewards Visa Signature Credit Card—for select users. Using this, people can pay for their daily purchases using their card and earn crypto cashback rewards. On the card’s adoption, Prince noted in a press release, “The fact that cardholders are pacing towards over US$2 billion in annualized spend reinforces BlockFi’s mission to provide clients with broader access to financial products and services that allow them to invest in cryptocurrency more easily and, in the longer term, possibly set them on a path to build generational wealth.”
So, is BlockFi a safe and legitimate company?
In the literal sense of the word “legitimate”—yes, it is. Despite its current fallout with regulatory bodies, BlockFi is regulated by the New York State Department of Financial Services. It is an officially-registered business, even though it failed to register its services as securities. That said, bear in mind that your savings on the platform are not insured by the Federal Deposit Insurance Corporation (FDIC). So, if someone were to hack your account or there was some external force which deleted the contents of your interest account, you would lose all your investment.
After the settlement, BlockFi declared that it will be filing an official registration with the SEC for a new crypto lending product: BlockFi Yield. This indicates their renewed approach to creating crypto-products—one that actively involves the consent of government bodies.
As with most things in the cryptocurrency ecosystem, crypto companies are still finding their footing when it comes to regulations. As countries establish clear laws, it will become easier for companies to navigate this industry and not have to worry about settlements that might be worth millions of dollars.
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