The Texas State Securities Board has published a notice of a hearing against BlockFi over its cryptocurrency interest-earning accounts.

BlockFi, through its wholly owned subsidiaries BlockFi Lending and BlockFi Trading, is, in part, illegally funding its lending operations and proprietary trading through the sale of unregistered securities in the form of cryptocurrency interest-earning accounts. BlockFi refers to the cryptocurrency interest-earning accounts as “BlockFi Interest Accounts” (BIAs).

BlockFi permits Texans and other investors at least eighteen years old to apply to purchase the BIAs through its website or smartphone application.

A hearing will commence at 9:00 AM on OCTOBER 13, 2021, before an Administrative Law Judge. The hearing is being held via videoconference for the purpose of determining whether to issue a proposal for decision for the entry of a CEASE AND DESIST ORDER against BlockFi, Inc. BlockFi.

The regulator alleges that BlockFi Trading is licensed only as a Money Service Business in Texas. The license is limited to and extends only to conducting currency exchange or money transmission activities defined by Chapter 151 of the Texas Finance Code. The respondents are not licensed with the United States Securities and Exchange Commission.

Additionally, they are not registered with the Texas State Securities Board to offer or sell securities in Texas, as required by Section 12 of the Securities Act, and the BIAs are not registered or permitted for sale in Texas, as required by Section 7 of the Securities Act. Accordingly, Respondents are violating laws designed to protect Texans.

The BIAs are also not protected by Securities Investor Protection Corporation, otherwise known as the SIPC, a federally mandated, non-profit, member-funded United States corporation created under the Securities Investor Protection Act of 1970 that mandates membership of most US-registered broker-dealers.

The BIAs are also not insured by the Federal Deposit Insurance Corporation, otherwise known as the FDIC, an agency that provides deposit insurance to depositors in the United States, or the National Credit Union Administration, otherwise known as the NCUA, an agency that regulates and insures credit unions.

Further,BlockFi is not disclosing material information necessary for investors to make an informed decision, including critical material information about the risks associated with purchasing its unregistered securities.

This material information includes, without limitation, the amount of money devoted to permissive uses, the identity, nature, and creditworthiness of borrowers, the type and nature of transactions involving equities, options and futures, the risks associated with individual equities, options and futures, the profits and/or losses derived from transactions, and financial information reflecting the assets and liabilities and cashflow.

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. According to the regulator, BIAs constitute investment contracts, notes, or evidences of indebtedness regulated as securities.

Respondents are allegedly violating Section 7 of the Securities Act by offering and selling securities in Texas that are not registered or permitted for sale in Texas. They are also accused of violating Section 12 of the Securities Act by offering and selling securities in Texas without first being registered as dealers or agents.

On or about April 20, 2021, the Enforcement Division of the State Securities Board notified BlockFi that it may have offered securities in Texas that may not comply with the Securities Act.

The Enforcement Division also explained the regulation of the securities market in Texas, including the identification of laws that require the registration of securities, the registration of dealers and agents, and the truthful disclosure of all known material facts.

Nevertheless, the respondents have continued to offer the BIAs to Texans in violation of Sections 7 and 12 of the Securities Act.

The Enforcement Division is seeking a proposal for decision for the entry of an order that Respondents immediately cease and desist from violating Sections 7 and 12 of the Securities Act.

As of March 31, 2021, Respondent BlockFi has more than $15,000,000,000.00 in assets under management and more than 350,000 funded accounts from the sale of BIAs.

As of June 9, 2021, Respondent BlockFi has more than $691,000,000.00 in assets under management from more than 25,000 Texas residents.

Earlier this week, the New Jersey Bureau of Securities issued a Summary Cease and Desist Order to stop BlockFi, Inc from selling unregistered securities in the form of interest-earning cryptocurrency accounts that have raised at least $14.7 billion worldwide.