SEC Warns Investors of Risks Associated with Interest-Bearing Crypto Accounts

Company Settles SEC Charges for Failure to Register Crypto Lending Product

A company settled with the SEC and the North American Securities Administrators Association (“NASAA”) for failing to register the offers and sales of its retail crypto lending product.

In its Order, the SEC found that the company had offered and sold certain interest-bearing accounts to investors. Through the accounts, the investors loaned crypto assets to the company in exchange for the company’s promise to provide a variable monthly interest payment. The SEC found that the accounts were securities that were subject to registration under the Securities Act of 1933, and did not benefit from any SEC registration exemption. Additionally, the SEC found that the company operated as an unregistered investment company and made materially false and misleading statements concerning the risks associated with its lending activity.

The SEC determined that the the company violated Sections 5(a) (“Sale or delivery after sale of unregistered securities”), 5(c) (“Necessity of filing registration statement”), 17(a)(2) and 17(a)(3) (“Use of interstate commerce for purpose of fraud or deceit”) of the Securities Act and Sections 3(a)(2) (“Definitions of investment securities”) and 7(a) (“Prohibition of transactions in interstate commerce”) of the Investment Company Act.

The company agreed to (i) cease its unregistered offers and sales and attempt to bring its business within the provisions of the Investment Company Act and the Securities Act, (ii) pay a $50 million penalty and (iii) comply with the undertakings detailed in the Order.

The company also agreed to pay an additional $50 million penalty to 32 states for the same conduct. According to the NASAA press release discussing the charges, the company is alleged to have “failed to comply with state registration requirements and, as a result, investors were sold unregistered securities in violation of state law.” The $50 million penalty will be evenly divided amongst the members of NASAA.

Commissioner Hester Peirce dissented from the SEC’s enforcement action, stating that she does not believe the approach the SEC is taking with respect to crypto lending is the best way to protect crypto lending customers. Ms. Peirce stated that the $100 million penalty for the company “seems disproportionate” in light of the absence of any allegations from the SEC that the company failed to pay its customers the money due them or to return the crypto assets that were lent. She argued that while the portion of the settlement “aimed at getting important information to customers is more understandable from a retail protection standpoint,” it is worth questioning “whether a framework other than the securities regulatory framework might be better suited to getting customers transparency around the terms and risks of crypto lending products.” Ms. Peirce concluded that the settlement may have “unfortunate” consequences, including preventing retail crypto lending products from being offered to customers in the United…