BlockFi's interest product draws scrutiny from Alabama, Texas regulators

Securities regulators in the U.S. states of Alabama and Texas have set the stage for potential cease-and-desists against crypto startup BlockFi for its Interest Account product.

The Texas State Securities Board alleged in a notice of hearing published Thursday that the BlockFi Interest Account is a security under state law. The notice of hearing gives BlockFi 20 days from the serving date to respond to the TSSB's notice ahead of a planned October 13 hearing on the matter. CoinDesk first reported the news.

The TSSB said in its notice that it informed BlockFi about its position in late April. 

"On or about April 20, 2021, the Enforcement Division of the State Securities Board (the “Enforcement Division”) notified Respondent BlockFi that Respondents 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, Respondents have continued to offer the BIAs to Texans in violation of Sections 7 and 12 of the Securities Act."

The developments come less than a day after securities regulators in Alabama announced a show cause order, also aimed at the BlockFi Interest Account, which it accused the firm of "the sale of unregistered securities in violation of the Securities Law." Per the document, "[t]he Order gives [BLockFi] 28 days to show cause why they should not be directed to cease and desist from selling unregistered securities in Alabama."

Earlier this week, the New Jersey Bureau of Securities ordered BlockFi to stop accepting new interest account users in the state. The initially announced halt date was extended from July 22 to July 29. 

As in the past, BlockFi argues that its interest product is not a security. A representative for the firm told The Block in an email that "[w]e are in active dialogue with multiple regulators to demonstrate that the BlockFi Interest Account (BIA) is not a security and should not be regulated as one."

"We firmly believe that the BIA is lawful and appropriate for crypto market participants and we remain steadfast in our commitment to fight for consumers’ rights to earn interest on their crypto assets. We welcome discussions with regulators and believe that appropriate regulation of this industry is key to its future success," the rep continued.