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US state authorities have opened a new front in the regulatory crackdown on the cryptocurrency business targeting BlockFi, a company that has raised $14.7 billion by offering interest-bearing crypto accounts.
In recent days, Texas, New Jersey and Alabama have claimed the accounts amounted to an unregistered offering of securities. New Jersey ordered the company to stop offering the product from July 29, and the other US states threatened to take similar steps unless BlockFi could discourage them.
“Our rules are simple: If you sell securities in New Jersey, you must abide by New Jersey’s securities laws,” Andrew Bruck, the state’s acting attorney general, said Tuesday. “Nobody gets a free pass because they operate in the rapidly evolving cryptocurrency market.”
New Jersey-based BlockFi said in a tweet that its interest-bearing account “is not a security” and believed it was “lawful and appropriate for crypto market participants.” It added: “We remain steadfast in our commitment to fight for the rights of consumers to earn interest on their crypto assets.”
The state-level regulatory flurry was especially significant as it came as state authorities scrambled in Washington to formulate rules for cryptocurrencies.
Political observers noted that until July 16, the New Jersey Attorney General’s office was headed by Gurbir Grewal, who has left the elected post to head the enforcement division of the Securities and Exchange Commission, making him a key figure in the emerging federal response to cryptovalue.
The other intriguing aspect of BlockFi’s containment was that states on both sides of the US political divide were involved. New Jersey is a blue state. Alabama and Texas are red. Bipartisanship on cryptocurrencies, at least on some level, seemed like a possibility.
“It’s an unusual group of states,” said Alexis Goldstein, director of financial policy at the Open Markets Institute in Washington, adding, “There are real twofold concerns about investor protection.”
BlockFi received a $3 billion valuation from investors including Bain Capital Ventures and Tiger Global Management in March, and is reportedly seeking funds valued at nearly $4.8 billion. The company said in March it was on track to generate more than $500 million in annual revenue.
The state regulators said BlockFi offered an “attractive” annual interest rate — up to 8.6 percent, according to the Texas filing — in exchange for deposits of cryptocurrencies such as bitcoin and ethereum on its BlockFi Interest Account, or BIA. As of March 31, deposits were “the equivalent of $14.7 billion,” according to New Jersey authorities.
BlockFi “then pools these cryptocurrencies together to fund its lending activities and proprietary trading,” according to the New Jersey filing. It added that “BlockFi is free to use those assets as it sees fit, including mixing cryptocurrency with those of other BIA investors”.
Richard Levin, chairman of the fintech and regulatory practice at the law firm Nelson Mullins, said the cases could be a key factor for investigation by federal regulators.
“The state of New Jersey, the state of Texas and others may well argue that this looks like a product that is a security based on some precedent that applies to certain types of debt instruments,” Levin said.
In their filing, Texas regulators noted that the state law “broadly defined” securities to include not only “traditional products such as stocks and bonds,” but also “investment contracts, notes, and proofs of debt.”
These “broad product categories,” according to the Texas filing, “capture the endless number of unique and innovative investment programs that are continuously being introduced to the market.”