SEC BlockFi settlement misfires for working families

SEC BlockFi settlement misfires for working families 

The Securities and Exchange Commission (SEC) has a three-part mission: protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. Chair Gary Gensler focuses on the first, “Every day, I am animated by working families and what the SEC means to them.”

Yet paradoxically, his zeal to enforce securities laws has had the opposite effect. Far from helping working families, he is quashing their wealth-creating opportunities.

The SEC’s latest foray into enforcement-policy-gone-wrong is the widely reported settlement with virtual marketplace and crypto lender BlockFi. Details reportedly include a massive $100 million dollar fine and promise to stop accepting new accounts. (At the time of settlement, 32 state securities agencies were also investigating BlockFi, collectively they will receive half the fine).

SEC BlockFi settlement didn’t end fraud it ended earning opportunities for working families

A reader unfamiliar with the Gensler-led SEC might presume the commission had just ended a major scam operation or stopped fraudsters raising capital by promising the unsuspecting lavish and unattainable returns on some pie-in-the-sky crypto venture.

Indeed, in speeches Mr. Gensler frames his enforcement push exactly this way:

Without examination against and enforcement of our rules and laws, we can’t instill the trust necessary for our markets to thrive. Stamping out fraud, manipulation, and abuse lowers risk in the system. It protects investors and reduces the cost of capital. The whole economy benefits from that. . . . It is critical that our enforcement program have tremendous breadth, be nimble, and penalize bad actors so we discourage misconduct before it happens. . . .

Some market participants may call this “regulation by enforcement.” I just call it “enforcement.” 

Stamping out fraud, manipulation, and abuse, sounds great until one realizes BlockFi had done none of this. In a press release the SEC claims BlockFi failed to disclose the level of risk in its interest-bearing products.  But no one was ever defrauded, as Commissioner Hester Peirce relayed in a statement, “While penalties this size are intended to deter bad conduct, here there is no allegation that BlockFi failed to pay its customers the money due them or failed to return the crypto lent to it.  BlockFi’s misrepresentations about over-collateralization are serious, but the combined $100 million penalty nevertheless seems disproportionate.”

Virtual Marketplaces Provide passive income to impoverished people

What BlockFi was doing was providing working families an opportunity to generate passive income. These assets (Bitcoin and other crypto) that has seen startling market gains with the potential for much more. (One investment firm predicts Bitcoin will reach $1 million by 2030).

Working families could park their Bitcoin and other crypto holdings with BlockFi and earn between 5-10 percent APY. BlockFi relends these holdings at even higher rates and splits the interest with account holders.

Thus, working families benefited in two ways: (i.) any asset appreciation was theirs after they withdrew their holdings (of course any loss was too, but that’s a function of the supply and demand); (ii.) the interest earned in crypto was theirs as well.

These are game changing numbers for working families. Someone spending buying Bitcoin with their $1,200 stimulus check in April 2020 would have had $11,000 in October 2021. A BlockFi account would have provided an additional 5-10 percent interest. The numbers are less now but history says they will rebound at some point.

SEC BlockFi settlement latest example of crypto hostility from federal government

The story has played out across the crypto world in the past four years (pre-dating Mr. Gensler). As the commission has attacked companies without a hint of fraud including Kik and Telegram and currently lawsuits against XRP/Ripple and LBRY. Non-fungible tokens (NFTs) are likely next.

In addressing securities professionals last November, Gensler chided them for their lack of public spiritedness. “You all have our own clients, to be sure. Working in a field such as finance that touches so many lives, though, you also have another responsibility: a responsibility to the public.”

A corollary to this exists. Bureaucrats should not harm the public by using their position to climb the ladder to more powerful positions. Cynics accuse Mr. Gensler of using crypto enforcement to do just that.  

But whether he is actually animated by working families, his own ambition, or both, he only hurt working families.

Note: In a tweet thread by BlockFi’s CEO, the company announced today it will register its products with the SEC. And it may eventually accept new accounts.

By Jossey PLLC

A version of this post first appeared on the blog of the Competitive Enterprise Institute

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