Kentucky Regulators Take Action Against BlockFi Interest Accounts

By Crypto Bucket

Kentucky became the fifth state to regulate BlockFi, a crypto exchange firm. This action in late July came from the Kentucky Department of Financial Institutions. It issued BlockFi a cease-and-desist order. This order barred the firm from offering BlockFi Interest Accounts (BIAs). This order affects future Kentucky customers only. It does not affect its clients in other jurisdictions.

Previous states to block BlockFi include Texas, Vermont, Alabama, and New Jersey. Texas issued a cease-and-desist order like Kentucky. New Jersey, Alabama, and Vermont filed "show-cause" orders.

Kentucky issued this order after an investigation. It claimed that the company's BIAs are securities. As such, by law, they need regulation and registration.

BlockFi will comply according to a company statement posted to Twitter on July 28th. It will stop offering its BIAs to new Kentucky customers. The company does so though it disagrees with the reasons behind the order. BlockFi says that it welcomes "appropriate regulation of this industry."

Here is what BlockFi had to say about its interest accounts:

“We firmly believe that the BIA is lawful and appropriate for crypto market participants, and we remain steadfast in our commitment to fight for consumers’ rights to earn interest on their crypto assets.”

What is BlockFi?

BlockFi is one of the few crypto companies based in the United States. Co-founders Zac Prince and Lori Marquez founded BlockFi in 2017. Its website boasts that it works with over one million clients to manage over $10 billion in assets.

BlockFi is a private company that offers crypto exchange and lending services. Crypto lending is a type of DeFi, or Decentralized Finance. It allows investors to lend their crypto to borrowers. Investors receive interest payments as a result, or "crypto dividends."

BlockFi offers two main services as a cryptocurrency lending firm.

1. It offers accounts that bear interest, called “BIAs.”

2. It provides customers with a crypto credit card.

A typical customer uses BlockFi to store and earn interest on their crypto assets. It even offers ACH deposits, making it popular among more users. The company also allows lending services that use crypto as collateral. It has done so since January 2018.

BlockFi offers eight currencies:

  • Bitcoin (BTC)
  • Ethereum (ETH)
  • LiteCoin (LTC)
  • Paxos Standard Token (PAX)
  • PAX Gold (PAXG)
  • USD Coin (USDC)
  • Tether (USDT)
  • Gemini Dollar (GUSD)

Experts see BlockFi as an ideal fit for beginner to intermediate crypto investors. It is great for investors who look to bridge the gap between crypto and traditional finance. BlockFi also attracts investors who are trying to earn passive income.

Experts consider BlockFi a cheaper exchange than competitors. BlockFi charges zero monthly fees and zero fees on trades. It does charge fees for withdrawals. One downside is that some investors may seek a platform with joint or custodial accounts.

Kentucky’s regulations take issue with BlockFi interest accounts in particular. These interest accounts have been popular among users. To better understand them, it is useful to examine how they affect users. BlockFi’s platform has two downsides to its interest accounts. These include:

  • Limited free withdrawals from BlockFi interest accounts (one per month)
  • Savings are not protected in the event of bank failure

BlockFi is a leading player in the crypto world. BlockFi was the first company to launch a Bitcoin rewards credit card. This card is a Visa credit card that earns 1.5% back on purchases in Bitcoin. These rewards go straight to a user’s BlockFi interest account.

What are BlockFi Interest Accounts?

BlockFi’s interest accounts are being targeted by Kentucky. But what is unique about these interest accounts? BlockFi offers crypto savings accounts. These accounts have a higher rate of return than typical FDIC-insured U.S. banks. This attracts many users interested in crypto to its platform. BlockFi profits from lending funds deposited on the platform.

Traditional savings accounts do not need to follow securities regulations. But states are trying to regulate BlockFi interest accounts. These states argue that BIAs fall under the umbrella of “securities.”

BlockFi has maintained that the accounts should not count as securities. The company has worked with U.S. regulators to try to reach a consensus on this. Defining these interest accounts as such shocked many in the crypto world. Actions like these from state securities regulators could have large effects.

What Does This Mean for BlockFi?

BlockFi does see this action as a setback, and legal battles will likely follow. These battles will decide how long the order will remain.

Other crypto lending companies have reason to care about this. As crypto adoption grows, regulators seek to keep up. Whether governments can regulate crypto as a security is important. Many countries have weighed in on this issue. Crypto regulations hinge on this and other legal decisions like it.
Today, BlockFi continues to see success. Forbes named BlockFi to its 2021 Fintech 50 list.

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