• In a regulatory crackdown, three US states are targeting BlockFi

  • Individual state authorities in New Jersey, Texas, and Alabama have expressed concerns that BlockFi, a New Jersey-based DeFi business, is marketing unregistered securities. Regulators appear to be focusing their attention on BlockFi’s Interest Account (BIA), which offers rates similar to those seen in DeFi, but which have blown traditional banking rates out of the water.

    The ‘Strange Three’

    Crypto has largely been regarded a bipartisan topic in conversations around regulation and broader adoption since its relatively early emergence in debates around regulation and broader acceptance. As a result, the three states pursuing BlockFi are an unique trio. New Jersey, the business’s home state and a traditionally Democratic-leaning state, is likely the most active of the three states suing the company. According to a recent cease and desist letter from the state’s Bureau of Securities, BlockFi must stop marketing its BIA product to state citizens by July 29.

    Texas, a state with a long history of Republican rule, has also issued a cease and desist order, with a court date set for October. BlockFi “is, in part, illegally supporting its loan operations and proprietary trading through the sale of unregistered securities in the form of bitcoin interest-earning accounts,” according to the paper.

    Finally, Alabama, a traditionally Republican-led state, issued a ‘Show Cause Order’ to BlockFi this week. The company now has less than 30 days to justify why they should not be issued a cease and desist order for selling unregistered securities to the state securities commission. According to the show cause document, BIAs should be registered with the appropriate securities regulators.

    It’s becoming evident, at least in the case of BlockFi recently, that regulatory roadblocks exist on both sides of the political spectrum.

    Bitcoins can be deposited into BlockFi’s BIA product to earn a significant amount of interest.

    Is DeFi in Peril?

    BlockFi responded in a tweet, saying that it believes its BIAs are “lawful and suitable for crypto market players,” and that it welcomes “discussions with regulators.” It also believes “proper regulation of this industry is crucial to its future development.”

    It’s difficult to predict the effects of vigorous regulatory attacks on DeFi at this early stage, especially given that only BlockFi is being highlighted among the big competitors in the yield-generating market. Will additional states follow suit, and will major BlockFi competitors face similar challenges? Or are state authorities merely cracking the whip – or are there sufficiently significant differences in how BlockFi competitors, such as Nexo or Celsius, fund their interest-bearing accounts, that they incur less regulatory risk? In any case, new enterprises – but hopefully not forward-thinking customers – will face some intrinsic problems as a result of crypto’s relatively swift mainstream acceptance, combined with slow-moving federal decision-making.

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