Iowa will receive around $943,000 as part of a deal with cryptocurrency financial institution BlockFi.
Iowa Division of Insurance Commissioner Doug Ommen, whose agency regulates securities in the state, said in a press release this week that the company failed to properly register a financial product known as BlockFi interest accounts. Investors deposited cryptocurrencies like Bitcoin and Ethereum into the accounts, and the company returned a percentage each month.
BlockFi advertised monthly interest rates of up to 9.25%, depending on the volume and type of cryptocurrency an investor deposited. According to the US Securities and Exchange Commission, BlockFi needed to register the product as a security, a step the New Jersey-based company did not take.
The Iowa Division of Insurance took legal action against BlockFi as part of a group that included regulators from the SEC and 31 other state agencies. BlockFi agreed in February to pay a total of $100 million, stop offering interest-bearing BlockFi accounts in the United States, and stop accepting additional deposits from US customers into accounts that were already open.
BlockFi entered into a consent order with the Iowa Division of Insurance on June 8, agreeing to pay a $943,000 penalty in five installments through February 2024.
“While innovations such as cryptocurrencies can provide growth and evolution in the financial system, it is important for regulators to ensure that this occurs within an appropriate framework that protects investors while facilitating capital formation. responsible,” Ommen said in a statement.
When BlockFi settled with the SEC in February, company CEO Zac Prince announced a new product, BlockFi Yield, that would be a registered security.
“We always knew that strong engagement with regulators would be critical to the adoption of cryptocurrency-powered financial services,” Prince said in a statement at the time.
BlockFi’s consent order with the Iowa Division of Insurance came just before the company announced Monday that it will lay off 20% of its 850 employees, joining other cryptocurrency firms that are laying off staff amid a global recession. market. Bitcoin has lost value by 28% over the last week. Ethereum is down around 37%.
Prince said in a Twitter thread that the company needed to lay off staff due to a “dramatic change in macroeconomic conditions,” according to CNBC.
BlockFi grew rapidly during the pandemic. According to the consent order, Iowans had directed approximately $268,000 worth of assets into BlockFi interest accounts by the end of 2019. By the end of 2021, that figure stood at $14.7 million.
In addition to failing to register the product as security, BlockFi misled investors about the safety of their money, Iowa regulators wrote in the consent order.
BlockFi made money by lending cryptocurrencies to institutional investors. According to the consent order, BlockFi representatives wrote on the company’s website that those loans were “typically” over-collateralized, meaning the company had more than enough assets available to pay retail investors in the event of a default. that BlockFi debtors did not pay.
According to the consent order, BlockFi employees thought that institutional investors would be willing to provide security on loans, meaning that they would guarantee other assets to BlockFi if they were unable to repay their loans.
“But it quickly became apparent that large, intuitive investors were frequently unwilling to post large amounts of collateral to secure their loans,” the consent order between Iowa regulators and BlockFi representatives says.
About 24% of loans were overguaranteed in 2019, according to the order. About 16% were overcollateralized in 2020.
“Investors (BlockFi Interest Accounts) did not have complete and accurate information to assess the risk that…BlockFi might not meet its payment obligation,” the consent order says.
Of the penalty the company will pay to the Iowa Division of Insurance, about $189,000 will go to the agency’s enforcement fund. Another $754,000 will go to the Iowa Securities Investor Education and Financial Literacy Training Fund, which supports middle and high school programs.
Tyler Jett covers jobs and the economy for the Des Moines Register. Contact him at tjett@registermedia.com, 515-284-8215, or on Twitter at @LetsJett.