SEC BlockFi crypto loans

According to an SEC order BlockFi misrepresented its crypto loans as over-collateralized ‘when in fact most institutional loans were not.’

Read the full Securities and Exchange Commission cease-and-desist order at sec.gov.

BlockFi Crypto Loans

As well as being able to earn interest on crypto holdings, users of BlockFi can take out crypto loans backed by their funds. BlockFi themselves also lend out crypto to institutions – which is where the interest to pay its retail clients is derived from.

BlockFi SEC Order

The SEC – which has gone after BlockFi before – has now stated the crypto lending platform failed to properly protect investors from risk by collateralizing those institutional loans.

The SEC order goes on to say:

It quickly became apparent that large institutional investors were frequently not willing to post large amounts of collateral to secure their loans. Approximately 24% of institutional crypto asset loans made in 2019 were overcollateralized; in 2020 approximately 16% were over-collateralized; and in 2021 (through June 30, 2021) approximately 17% were over-collateralized.

As a result, BlockFi’s statement materially overstated the degree to which it secured protection from defaults by institutional borrowers through collateral. Through operational oversight, BlockFi’s personnel failed to take steps to update the website statement to accurately reflect the fact that most institutional loans were not over-collateralized.

BIA investors (BlockFi Interest Accounts) did not have complete and accurate information with which to evaluate the risk that, in the event of defaults by its institutional borrowers, BlockFi would be unable to comply with its obligation to pay BIA investors the stated interest rates or return the loaned crypto assets to investors upon demand.

Other charges made by the SEC include BlockFi operating as an unregistered investment company and violating the Securities Act.

In June 2021 BlockFi was valued at almost $5 billion but crypto exchange FTX is now rumored to be about to acquire it for $25 million. However BlockFi CEO Zac Prince has denied that on Twitter (@BlockFiZac).

The End of Centralized Crypto Lending?

Popular crypto Youtuber CryptosRUs has called the news surrounding BlockFi, Three Arrows Capital, Celsius, Babel Finance, Finblox, Voyager, CoinFLEX and other sites ‘the end of CeFi’ (referring to centralized crypto lending sites).

He noted that while DeFi (decentralized finance and its lending platforms) has its own issues with hacks and exploits, it hasn’t faced the same problems and liquidity crises centralized companies have in 2022 since the crypto market correction.

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Read more: BlockFi Liquidates Three Arrows Capital as Market Dumps Further