BlockFi Settlement: Yield-Bearing Crypto Product Enforcement

BlockFi agreed to pay $100 million in combined SEC and state penalties in February 2022 — $50 million to the SEC and $50 million to 32 state securities regulators — making it the largest crypto lending enforcement action at the time and establishing the precedent that yield-bearing crypto accounts constitute securities under both the Howey test (as investment contracts) and the Investment Company Act of 1940 (as unregistered investment company securities). This dual-track enforcement theory has since been applied to multiple DeFi lending protocols, staking services, and yield aggregators.

Background

BlockFi Lending LLC, a New Jersey-based crypto financial services company, offered “BlockFi Interest Accounts” (BIAs) beginning in 2019. BIAs allowed customers to deposit cryptocurrency with BlockFi and receive monthly interest payments at annual rates ranging from 3% to 9.5% — significantly above traditional bank deposit rates and competitive with the highest-yielding DeFi protocols.

BlockFi’s business model was straightforward: accept crypto deposits from retail customers, lend those deposits to institutional borrowers (trading firms, market makers, crypto hedge funds) at higher interest rates, and profit from the spread. At peak, BlockFi held over $10 billion in BIA customer deposits and served approximately 570,000 BIA account holders.

The SEC’s investigation began in late 2020 and proceeded through a Wells notice in early 2021, ultimately resulting in the February 2022 settlement.

SEC Legal Theory

The SEC’s complaint advanced two independent securities law theories:

Investment Contract Analysis (Howey Test)

The SEC argued that BIAs constituted investment contracts under the Howey test:

1. Investment of money. Customers deposited cryptocurrency — satisfying the first prong, as crypto constitutes “money or valuable consideration” under established precedent.
2. Common enterprise. BlockFi pooled all customer deposits into common lending pools, creating horizontal commonality — the fortunes of all BIA holders were linked through the shared pool.
3. Expectation of profits. BIA holders expected to receive interest payments — a direct financial return constituting “profits” under Howey.
4. Efforts of others. The interest payments depended entirely on BlockFi’s lending activities — its credit analysis, borrower selection, collateral management, and risk management determined whether profits materialized.

The SEC noted that BlockFi’s marketing materials emphasized the high yield available to BIA holders, comparing returns to traditional bank deposits and emphasizing the ease of earning “passive income” — language that reinforced profit expectations.

Investment Company Act Violation

The SEC’s second theory targeted BlockFi’s corporate structure. Under Section 3(a)(2) of the Investment Company Act of 1940, an entity that issues securities and is primarily engaged in investing, reinvesting, or trading in securities is an “investment company” subject to registration requirements.

The SEC argued that BlockFi was an unregistered investment company because:

• It issued securities (the BIAs) to the public
• It used BIA proceeds to invest in interest-generating loans (which themselves may constitute securities)
• Its primary business was the investment and management of pooled customer assets

This theory was particularly significant because the Investment Company Act imposes extensive structural requirements — independent boards, custody standards, leverage limits, diversification requirements — that are fundamentally incompatible with the way most crypto lending platforms operate.

Settlement Terms

The settlement imposed several requirements:

Monetary Penalties:

• $50 million civil penalty paid to the SEC
• $50 million in penalties paid to 32 state securities regulators
• Total: $100 million

Injunctive Relief:

• BlockFi agreed to cease offering unregistered BIAs to new U.S. investors within 60 days
• BlockFi’s parent company agreed to file a registration statement with the SEC for a new, registered lending product (BlockFi Yield) under the Securities Act
• BlockFi agreed to bring its operations into compliance with the Investment Company Act within 60 days

Compliance Undertakings:

• BlockFi agreed to retain an independent compliance consultant
• Quarterly compliance reporting to the SEC for 18 months
• Enhanced disclosure to existing BIA holders regarding the securities classification of their accounts

Precedential Impact

For Crypto Lending Platforms

The BlockFi settlement established that centralized crypto lending products are securities — eliminating the argument that lending products are “banking products” exempt from securities regulation. Subsequent SEC actions against Celsius Network, Voyager Digital, and Genesis Global Capital cited the BlockFi precedent in alleging identical securities law violations.

The practical consequence: any platform that accepts customer crypto deposits and pays interest or yield must either register the product as a security (under Reg A+, Reg D, or full registration) or cease offering the product to U.S. customers. BlockFi’s attempt to register a compliant product (BlockFi Yield) was ultimately unsuccessful — the company filed for bankruptcy in November 2022 following the collapse of FTX.

For DeFi Protocols

The BlockFi settlement’s implications extend to DeFi lending protocols, though the application is more complex. Decentralized lending protocols argue that no centralized entity accepts deposits or makes lending decisions — the protocol operates autonomously through smart contracts. The SEC has contested this characterization, arguing that protocol developers who control governance and earn fees from protocol operations satisfy the “efforts of others” prong.

For Staking Services

The SEC subsequently applied the BlockFi precedent to crypto staking services, arguing that staking programs where customers deposit crypto and receive yields constitute investment contracts under the same analysis. Enforcement actions against major staking providers followed the BIA enforcement template.

Connection to Broader Enforcement Trends

The BlockFi settlement fits within the SEC’s systematic approach to crypto market structure enforcement:

1. Token sales: ICO enforcement wave (2017-2020) established that token sales can be unregistered securities offerings
2. Lending products: BlockFi (2022), Celsius, Voyager, Genesis established that yield products are securities
3. Exchange operations: Enforcement against major exchanges established that listing securities tokens requires ATS or exchange registration
4. NFTs: NFT enforcement actions (2023) established that NFTs marketed with profit expectations are securities
5. DeFi protocols: DeFi enforcement (2023-2024) began extending securities classification to decentralized protocols

Each enforcement wave built on the precedents established by prior actions, creating a comprehensive (if enforcement-driven) regulatory framework for digital asset financial services. Collectively, the SEC brought 125 cryptocurrency-related enforcement actions between 2021 and 2024, generating $6.05 billion in penalties according to Cornerstone Research. Under the Atkins administration, enforcement pace crashed 60% to just 13 actions in 2025, with the SEC Crypto Task Force pivoting toward engagement-first regulation through 6 roundtables and Chairman Atkins’ November 12, 2025 Project Crypto initiative.

Lessons for Security Token Issuers

The BlockFi case provides several specific lessons for security token market participants:

Yield-bearing token structures require securities registration. If a security token pays interest, dividends, or revenue share, it is almost certainly a security under both Howey and potentially the Investment Company Act. The appropriate approach is to structure the offering under an exemption and use registered market infrastructure for distribution and trading.

Investment Company Act analysis is required. Token issuers whose business involves pooling investor funds for investment or lending must evaluate whether they qualify as investment companies under the 1940 Act. If so, they face a choice between registering as an investment company (with all attendant structural requirements) or qualifying for an exclusion (such as 3(c)(1) or 3(c)(7) for certain fund structures).

State enforcement is additive. The BlockFi settlement demonstrated that state securities regulators will enforce alongside the SEC, adding $50 million in state penalties on top of the $50 million federal penalty. Blue Sky law compliance is not optional even when federal exemptions are properly claimed.

For the SEC’s enforcement statistics across all digital asset categories, see our enforcement data analysis. For the Wells notice process that preceded BlockFi’s settlement, see our glossary. For the SEC’s enforcement tracker, see our dashboards.

The Registration Alternative: BlockFi Yield

As part of the settlement, BlockFi agreed to register a new lending product — BlockFi Yield — under the Securities Act. The registration attempt was instructive for the industry because it revealed the practical challenges of operating a crypto lending product within the securities regulatory framework:

Prospectus disclosure requirements. BlockFi was required to provide prospectus-level disclosure about its lending operations, including borrower creditworthiness analysis, collateral valuation methods, default rates, and risk factors. These disclosure requirements imposed transparency obligations that few crypto lending platforms had previously met.

Investment Company Act compliance. To avoid Investment Company Act registration (which would have imposed leverage limits, diversification requirements, and independent board requirements incompatible with its business model), BlockFi structured the Yield product under the Section 3(c)(5)(C) exclusion for companies primarily engaged in the business of purchasing or otherwise acquiring “notes, drafts, acceptances, open accounts receivable, and other obligations.”

Custody requirements. The registered product required qualified custodian arrangements for customer assets, adding operational complexity and cost compared to BlockFi’s previous self-custody model.

Ultimately, BlockFi’s registration effort became moot when the company filed for Chapter 11 bankruptcy in November 2022, three days after FTX’s collapse. BlockFi was both a creditor of and lender to Alameda Research, FTX’s trading arm, and the contagion from FTX’s failure destroyed BlockFi’s balance sheet.

The BlockFi Yield registration attempt — brief as it was — demonstrated that securities-compliant crypto lending products are technically feasible but operationally demanding. For issuers considering similar yield-bearing token structures, the BlockFi experience provides a roadmap of the regulatory requirements involved.

Impact on the Security Token Custody Ecosystem

The BlockFi settlement created ripple effects throughout the digital asset custody and infrastructure ecosystem that directly affect the security token market:

Bank custody retreat. Major custodian banks that had been evaluating crypto custody services accelerated their withdrawal from the market following BlockFi’s failure. The combination of the BlockFi precedent (establishing that yield products are securities), SAB 121 (imposing balance sheet recognition on custodied crypto assets), and the contagion failures of 2022 (Celsius, Voyager, FTX) created a risk profile that bank compliance departments deemed unacceptable. This retreat constrained the custody infrastructure available for security tokens and pushed institutional custody toward specialized providers like Securitize ($4 billion+ in tokenized AUM, including BlackRock’s $1.87 billion BUIDL fund) and Prometheum (first SEC-approved special purpose broker-dealer in 2024, combining custody through its Coinery LLC subsidiary with ATS trading via Ember ATS). The SEC’s 2025 guidance on broker-dealer custody relief and the DTC tokenization no-action letter (December 11, 2025) have begun to reverse this infrastructure contraction.

Insurance market contraction. The BlockFi bankruptcy revealed that many crypto custody providers operated with limited or no insurance coverage for customer assets. In the aftermath, the insurance market for digital asset custody tightened significantly — premiums increased 200-400% and coverage limits decreased. For security token issuers selecting custody providers, insurance coverage has become a critical due diligence factor that must be disclosed in offering documents and offering circulars.

Regulatory capital scrutiny. The BlockFi settlement’s emphasis on Investment Company Act compliance drew attention to the regulatory capital requirements applicable to entities managing pooled digital assets. Broker-dealers and ATS operators that custody security tokens must now demonstrate that their capital adequacy accounts for the risks highlighted by BlockFi’s failure — including counterparty credit risk, concentration risk, and liquidity risk.

Comparison with Traditional Lending Product Regulation

The BlockFi settlement illuminates the regulatory gap between traditional banking products and crypto lending products:

Bank deposit insurance. Traditional bank deposits are insured by the FDIC up to $250,000 per depositor, per institution. BlockFi BIAs offered no deposit insurance, yet marketed themselves as alternatives to bank savings accounts. The absence of deposit insurance — combined with the pooled, investment-like structure of BIAs — reinforced the SEC’s position that BIAs were securities, not deposit products.

Lending product registration. Traditional banks are exempt from securities registration for deposit products under Section 3(a)(2) of the Securities Act. This exemption applies only to entities that are banks under the Exchange Act — a definition that excludes crypto lending platforms like BlockFi. For token issuers considering yield-bearing structures, this means that the banking exemption is unavailable, and any yield product must be registered or structured under an offering exemption.

Prudential supervision. Banks are subject to prudential supervision by the OCC, FDIC, and Federal Reserve, which impose capital adequacy, leverage, and liquidity requirements designed to protect depositors. BlockFi operated outside this prudential framework, meaning that its customers had neither the investor protections of securities regulation nor the depositor protections of banking regulation — a regulatory gap that the SEC moved to close through enforcement.

For the SEC’s official BlockFi settlement order, see SEC Administrative Proceeding File No. 3-20758.