Alabama regulators accuse BlockFi of offering unregistered securities

The state of Alabama has become the second state in the United States to raise concerns over BlockFi, a major cryptocurrency lending platform.

The Alabama Securities Commission (ASC) has issued a show cause order to New Jersey-based company BlockFi, ASC director Joseph Borg officially announced Wednesday.

Already facing a cease and desist order from the New Jersey Bureau of Securities, BlockFi now has 28 days to provide cause why the platform should not be forced to cease and desist from selling “unregistered securities” in Alabama, the regulator said.

According to the ASC, BlockFi's interest-earning cryptocurrency BlockFi Interest Accounts constitute securities.  “BlockFi has raised at least $14.7 billion worldwide through the sale of these securities,” the regulator claimed.

The ASC alleged that BlockFi, alongside its affiliates BlockFi Lending and BlockFi Trading, have been funding its crypto lending operations and trading “at least in part” through funds generated from the sale of unregistered securities in violation of securities laws. The order also claimed that BlockFi has failed to disclose to investors that its BIAs are not approved by the ASC or any other securities regulator, despite the firm touting itself as a “U.S. regulated entity.”

BlockFi subsequently said that the company was aware of the ASC’s show cause order, assuring that it has been engaged in “active dialogues with regulators worldwide,” including those in Alabama. The firm remains confident that its products are lawful and appropriate for crypto market participants, BlockFi said, adding, “Our stance hasn't changed — the BlockFI Interest Account is not a security.”

[1/1]We are aware of the show cause order issued by the Alabama Securities Commission. We have active dialogues with regulators worldwide, including those in Alabama, to share details about our products, which we believe are lawful and appropriate for crypto market participants.

— BlockFi (@BlockFi) July 21, 2021

The ASC said that the action comes amid rising concerns over the growing popularity of decentralized finance platforms like BlockFi, which are designed to provide financial services without relying on central financial intermediaries.

Related: World Economic Forum releases policy toolkit for DeFi regulations

In contrast to traditionally regulated banks and brokerage firms, investor funds are not protected by the Federal Deposit Insurance Corporation or Securities Investor Protection Corporation, thus presenting a higher risk of loss, the authority noted.

The ASC’s action comes two days after the New Jersey securities regulator issued a cease and desist order to BlockFi, blocking the platform from onboarding new interest account clients in the state.