Has the SEC ‘Wiped Out’ DeFi Lending Model with BlockFi Penalty?

The U.S. Securities and Exchange Commission’s massive fine of crypto lending platform BlockFi has sent shockwaves through the fledgling decentralized finance industry.

On Feb. 12, BeInCrypto reported that DeFi lending platform BlockFi could face a $100 million fine from the SEC for offering unregistered securities. The massive settlement represents the largest recorded penalty incurred by a crypto asset company.

BlockFi offers crypto asset interest accounts that enable users to earn far better yields than high street banks. However, the SEC has declared these interest-earning products as securities because crypto assets are used for lending and generating yields. The regulator also asserts that BlockFi misled investors about the levels of risk in lending activities and its loan portfolio.

End of DeFi lending?

On Feb. 14, BlockFi announced that it plans to register a new regulatory compliant lending product that would be a first in the crypto industry.

However, the massive penalty is a heavy blow to the DeFi ecosystem which is largely made up of decentralized lending and borrowing platforms. Speaking to TechCrunch, crypto-asset attorney Max Dilendorf said the SEC has essentially “wiped out” the DeFi lending business model.

He added that any crypto platform wanting to provide interest-bearing accounts would need to essentially become a publicly-traded company. This is the total antithesis of DeFi which is largely operated by decentralized autonomous organizations (DAOs).

Firms that want to take this route will need to file an S-1 statement which is akin to launching an initial public offering (IPO). This costly process also requires any investors to be accredited.

 “[Filing an S-1] is not compatible with DeFi at all. The only reason why BlockFi succeeded is because it had many individual users who were just connecting their Metamask wallets or whatnot, and earning interest.”

BlockFi should be able to ride this out since it has raised $450 million since inception and is now valued at $3 billion. Similar SEC action against smaller DeFi platforms is likely to wipe them out, however.

Feeding the rich

The SEC has maintained that lack of investor protection is what drives its policies on crypto. Yet the regulator is making it increasingly harder for regular retail investors to participate in DeFi. By fining firms millions and forcing them through all the traditional finance hoops, it is essentially limiting investment opportunities to institutional entities only.

It is highly likely that the SEC will start targeting other DeFi platforms and products in the wake of BlockFi’s monumental fine. Last year, it jumped all over Coinbase’s Lend product threatening a lawsuit and forcing the company to withdraw plans for higher interest earnings for its customers.