Five continents work together. After stablecoins and Binance, BlockFi becomes a new "target" of crypto regulation

BlockFi's tweet on Friday was bad news for its fans in Kentucky, where the state's Department of Financial Institutions has issued an order to BlockFi prohibiting it from opening new BIA interest accounts in the state, saying its products are securities. It said that although the company believes its interest account product is not a security, it will stop offering it to new customers in Kentucky. Kentucky also became the fifth state to take regulatory action against BlockFi's interest accounts after New Jersey, Alabama, Texas and Vermont.

But BlockFi still stated: "BlockFi firmly believes that BIA is legal and suitable for crypto market participants."

Regulators never show mercy to their prey

From stablecoins to the centralized exchange Binance, when crypto ecosystem products grow to a certain size, they begin to become the "hunting target" of global supervision. Recently, as the size of the entire crypto market has been expanding, this phenomenon has been intensifying, and the entire ecosystem is under tremendous regulatory pressure. From the initial questioning of USDT's underlying assets to the hearing on Libra, global regulators have always been reserved and skeptical about stablecoins. On July 19, Yellen convened the President's Working Group on Financial Markets (PWG), the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation to discuss the risks of stablecoins, and asked regulators to take prompt action to ensure that the United States has an appropriate regulatory framework.

Binance was directly cut off by regulators in various countries. For example, after the UK Financial Conduct Authority (FCA) announced in June that it would not allow Binance to conduct any regulated activities in the country, several British banks began to ban and intercept users from making remittances to Binance. Bitpush reported on Tuesday that banking giant HSBC has also joined the team to "encircle" Binance.

Spiral business model

Compared to stablecoins and Binance, BlockFi's size does not seem so impressive. But as the leading business of the cryptocurrency service company, its most popular BlockFi Interest Account (BIA), which provides interest-bearing savings services for digital assets, has gradually become a thorn in the eyes of US state regulators. As of March 2021, the company operates a total of more than 350,000 BIA accounts and manages more than $15 billion in assets. These accounts are a fundamental part of BlockFi's business model. BlockFi really relies on these huge savings accounts to provide sufficient liquidity for its lending system.

Once the funds are deposited, BlockFi is free to use them. The company uses deposits to trade digital assets, but also provides loans to its institutional clients. In return for the risk of depositing users, these deposits usually earn monthly interest at very attractive rates.

Five continents work together, BlockFi's future is uncertain

It sounds like BlockFi can enter a spiraling stage of healthy development with this excellent business model, but the good times did not last long. In the past period of time, Texas, New Jersey, Alabama and Vermont in the United States have respectively declared that it constitutes an unregistered securities offering under the Securities Act BIA, and BlockFi was ordered to immediately cease relevant business operations in these states. The bill defines the term "financial securities" to include traditional products such as stocks and bonds. It also includes investment contracts, commercial paper and debt securities in the definition of financial securities.

Although creating an account on BlockFi does not create a security or asset itself, BIAs can be considered financial securities under the definition of US law. In fact, the definition of the Securities Act is very broad because the decision usually comes from the courts.

BlockFi also responded, explaining in a tweet that its BIA accounts are “not financial securities” and that they are “legal for cryptocurrency market participants.”

The states do not all agree on how to deal with BlockFi.

New Jersey's attitude is very tough. The official statement clearly stated why they believe BlockFi interest accounts are unregistered securities. "A recent DFI investigation found that Blockfi offered securities in the form of investment contracts related to deposits of virtual currency with the company." The Kentucky Department of Financial Institutions has also shown a similar attitude. The regulator has issued an order to BlockFi prohibiting it from opening new BIA interest accounts in the state.

Regulators in Texas and Alabama have a more moderate attitude. Texas has ordered BlockFi to attend a hearing on October 13, 2021 to determine whether it is necessary to terminate the company's business in Texas. Alabama issued a warning while continuing its investigation.

But the starting point of these regulators is similar, all accusing BlockFi of not adequately protecting its investors. This is indeed the case, and investors’ losses are not insured or protected by the Federal Deposit Insurance Corporation (FDIC) or the Securities Investor Protection Corporation (SIPC), whose insurance is mandatory for issuers of financial securities.

If we really want to get serious about regulation, BlockFi is not the only company that follows this business model. Coinbase, Compound, and Aave are all dark horses in this field, and Coinbase is already a Nasdaq-listed company.

Regarding the future regulatory prospects, a BlockFi spokesperson also stated that the company will fight for its rights. "We firmly believe that the BIA is legal and appropriate for cryptocurrency market participants, and we remain steadfast in our commitment to fighting for consumers' rights to earn interest on the crypto assets they have earned."