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Iowa State Fines BlockFi for Overstatements About Collateralization

2 mins
Updated by Kyle Baird
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In Brief

  • Iowa ordered BlockFi to pay an administrative fee of $900,000 following an investigation into its loan products.
  • The state discovered that only a small percentage of BlockFi's loans were overcollateralized, contradicting claims made in advertisements.
  • Other major crypto companies are seeking guidance on how to proceed with interest-bearing products, not wanting to go down the same path as BlockFi.
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The state of Iowa has ordered BlockFi Lending LLC to pay a fine and cease making false statements regarding the securities it offers.

Crypto lender BlockFi is in hot water with state regulators in Iowa after making false claims regarding the collateralization status of loans it offers.

The Iowa Insurance Division’s Securities and Regulated Industries Bureau presided over this matter under Iowa Code 502.604, the Uniform Securities Act, which grants the body the power to “issue an order directing the person to cease and desist” from engaging in an “act, practice or course of business” in violation of Chapter 502 of the Uniform Securities Act.

“While innovations, like cryptocurrencies, may provide for growth and evolution in the financial system, it is important that regulators ensure this occurs within an appropriate framework that protects investors while still facilitating capital formation,” said Iowa Insurance Commission Doug Ommen, who issued a consent order to the firm.

In addition to a settlement of $50 million divided equally among 53 jurisdictions, including 50 U.S. states and the District of Columbia, Peurto Rico, and the U.S. Virgin Islands, BlockFi has been ordered to pay an administrative fine of $943,000 to the State of Iowa in five installments of approximately $188,000.

BlockFi faces the music

This order is the culmination of a joint 53-state investigation by the North American Securities Administrators Association into BlockFi’s lending activities. One of the association’s members, the state of New Jersey, filed a cease and desist order on July 19, 2021, alleging that BlockFi, its holding company BlockFi Inc., and its affiliate BlockFi Trading LLC were offering and selling unregistered securities.

The states of Alabama and Vermont later filed orders to show cause alleging BlockFi, its affiliate, and holding company were pushing unregistered securities on residents.

BlockFi claimed on its website that its loans were “typically” overcollateralized (collateral posted exceeds the amount borrowed) without providing evidence. Upon investigation, Iowa regulators discovered that only 17% of loans offered in 2021, 16% in 2020, and 24% in 2019 were overcollateralized. The state watchdog alleges that investors were thus misled into assuming greater protection than was available.

“Iowans should make sure they are only investing in what they should be willing to lose,” Ommen concluded.

In settling, the company neither admits nor denies conclusions drawn in the consent order. BlockFi recently paid $100 million to the Securities and Exchange Commission for offering unregistered securities.

Other major crypto companies seek regulatory clarity on interest-bearing products

In April 2022, Be[In]Crypto reported that major crypto companies Kraken, Bitstamp, and Circle were eager to offer interest-bearing products and did not want to go down the same route as BlockFi and Celsius but were seeking regulatory clarity.

 “Some crypto players in the U.S. have gotten in big trouble with how they’ve managed lending and credit-type offerings. We don’t want to go there, so we’re going to be super-diligent,” said the CEO of BitStamp USA, Bobby Zagotta, at the time.

In September last year, Texas regulators ordered Celsius, which offers yields of up to 17% on staked tokens, to appear at a hearing, justifying why it should be allowed to continue operating in the state.

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David Thomas
David Thomas graduated from the University of Kwa-Zulu Natal in Durban, South Africa, with an Honors degree in electronic engineering. He worked as an engineer for eight years, developing software for industrial processes at South African automation specialist Autotronix (Pty) Ltd., mining control systems for AngloGold Ashanti, and consumer products at Inhep Digital Security, a domestic security company wholly owned by Swedish conglomerate Assa Abloy. He has experience writing software in C,...