The earning feature allowed investors to deposit crypto assets in an account on the company’s platform. In exchange, the company would deploy the deposited assets to generate revenue which accrued to the account. The company rolled out the lending product in 2020, pitching it as a way for investors to “Put your crypto assets to work for you.” The product, however, was voluntarily abandoned in 2022. 

In its order the SEC found that the lending product constituted the offering and sale of an “investment contract,” which is a security under the Supreme Court’s Howey test. See SEC v. W.J. Howey Co., 328 U.S. 293, 301 (1946). In its order, SEC found that the lending product violated the 1933 Securities Act which prohibits the offering of unregistered securities. In a parallel action, the DFPI entered a consent order by which the company settled a DFPI-led investigation into the crypto lending product. The company settled federal and state regulators’ charges to the tune of $1.5 million each.

Putting it into Practice: This enforcement action is emblematic of the proactive stance the SEC and many other regulators have taken on crypto and blockchain-based products. “Investment contracts” is interpreted to include many crypto-based financial products. In particular, regulators have targeted crypto products offering users the chance to passively generate interest income (discussed here and here). Providers of crypto-based financial products and services have also attracted the scrutiny of the CFPB, the FTC, and other regulators, both state and federal, for concerns surrounding payments, banking, and money-laundering among others (discussed here, here, here, and here). Market participants offering crypto-based financial products should operate with heightened caution in a murky legal environment where regulators have shown a willingness to regulate through enforcement.