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US state authorities have opened a new front in the regulatory crackdown on the cryptocurrency business, taking aim at BlockFi, a company that has raised $14.7bn by offering interest-bearing crypto accounts.
In recent days Texas, New Jersey and Alabama have alleged 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 dissuade them.
“Our rules are simple: if you sell securities in New Jersey, you need to comply with New Jersey’s securities laws,” Andrew Bruck, the state’s acting attorney-general, said on Tuesday. “No one gets a free pass simply because they’re operating in the fast-evolving cryptocurrency market.”
New Jersey-based BlockFi said in a tweet 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 consumers’ rights to earn interest on their crypto assets.”
The regulatory flurry at the state level was particularly significant because it came as national authorities in Washington have been scrambling to formulate rules for cryptocurrencies.
Political observers noted that until July 16, the New Jersey attorney-general’s office had been headed by Gurbir Grewal, who has left the elected post to run the enforcement division of the Securities and Exchange Commission, making him a key figure in the emerging federal response to crypto.
The other intriguing aspect of the BlockFi clampdown was that it involved states on either side of the US political divide. New Jersey is a blue state. Alabama and Texas are red. Bipartisanship on cryptocurrencies, at least on some level, seemed a possibility.
“It is an unusual group of states,” said Alexis Goldstein, director of financial policy at the Open Markets Institute in Washington, adding: “There are real bipartisan concerns about investor protection.”
BlockFi received a $3bn valuation in March from investors including Bain Capital Ventures and Tiger Global Management and is reportedly seeking funds at a valuation as high as almost $4.8bn. The company said in March it was on track to produce more than $500m in yearly revenue.
The state regulators said BlockFi offered an “attractive” annual interest rate — of up to 8.6 per cent, according to the Texas filing — in return for deposits of cryptocurrencies such as bitcoin and ethereum in its BlockFi Interest Account, or BIA. As of March 31, the deposits amounted to “the equivalent of $14.7bn”, according to the New Jersey authorities.
BlockFi “then pools these cryptocurrencies together to fund its lending operations and proprietary trading”, the New Jersey filing said. It added that “BlockFi is free to use those assets as it sees fit, including commingling cryptocurrency with those of other BIA investors”.
Richard Levin, chair of the fintech and regulation practice at the law firm Nelson Mullins, said the cases could be a bellwether for scrutiny from federal regulators.
“The state of New Jersey, the state of Texas and others very well may 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, the Texas regulators noted that state law defined securities “broadly” to include not only “traditional products such as stocks and bonds” but “investment contracts, notes and evidences of indebtedness”.
These “broad categories of products,” the Texas filing said, “capture the endless number of unique and innovative investment schemes continuously introduced into the market”.