On July 20, 2021, New Jersey’s Acting Attorney General announced that the State’s Bureau of Securities issued a Summary Cease and Desist Order to stop BlockFi, Inc. from selling unregistered securities in the form of interest-bearing cryptocurrency accounts. While commentators frequently focus on the enforcement activities of the Securities and Exchange Commission in the crypto space, New Jersey’s action against DeFi platform BlockFi serves as a reminder that state securities regulators also actively police this marketplace.

According to the Bureau of Securities order, BlockFi, through its affiliates BlockFi Lending, LLC and BlockFi Trading, LLC, funded its cryptocurrency lending operations and proprietary trading business in part through the sale of unregistered securities in violation of the New Jersey Securities Law. The order further notes that BlockFi allowed both individual and business investors to purchase a BlockFi Interest Account by depositing certain eligible cryptocurrencies – including Bitcoin and Ethereum – into accounts at BlockFi. BlockFi then pooled the cryptocurrency deposits together to fund its cryptocurrency lending operations and proprietary trading. In exchange for investing in the BlockFi Interest Accounts, investors received interest paid monthly in cryptocurrency.

Without elaboration, the order summarily concludes that BlockFi Interest Accounts are securities under the New Jersey Securities Law.  Notably, the statutory definition of “security” in New Jersey is similar to the federal one, and includes the concept of an “investment contract.”  The order also finds that, despite advertising on its website that BlockFi is a “US regulated” entity, BlockFi failed to disclose to investors that its BlockFi Interest Accounts are not registered with the Bureau or any other securities regulator, or exempt from registration.  Additionally, the order found that BlockFi failed to make other relevant disclosures to investors about its business and operations. The order clarifies that while certain of BlockFi’s lending operations appear to be licensed under certain state lending requirements, as money service businesses or as money transmitters, these licenses were insufficient to offer securities to investors.

Update: Since New Jersey first announced its enforcement order against BlockFi, others states, including Texas and Alabama, have also brought administrative securities enforcement cases on a similar legal theory.  Texas’s notice of hearing, for example, states that the “mere fact an investment is tied to a cryptocurrency, blockchain technology, or some type of digital asset does not remove it from securities regulation if it constitutes an investment contract, note, evidence of indebtedness, or other type of security.” Alabama’s show-cause order concludes that the BlockFi Interest Accounts are investment contracts, and thus securities, by virtue of the fact that they “constitute the solicitation of an investment of money; from which an investment return is expected; with such investment return based on the managerial efforts” of the BlockFi companies.