The Pomp Podcast - #828 BlockFi's $100M Settlement Explained

Starting point is 00:00:00 What's up, everyone? This is Anthony Pompliano. Most of you know me as Pomp. You're listening to the Pomp Podcast, simply the best podcast out there. Now let's kick this thing off. Today's episode is a breakdown of the recent resolution between BlockFi, the SEC, and state regulators. I hope that this helps to unpack some of the nuances of the situation and also lays out a number of things to think about moving forward. Before we get into this episode, though, I want to quickly talk about our sponsors. Today's episode is sponsored by the Bitcoin 2022 conference. Bitcoin 2022 is the largest Bitcoin event in the world that takes place April 6th through the 9th in Miami Beach, Florida. All four days will be jam-packed with

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Starting point is 00:03:40 click the wallet icon to get started. Anthony Pompliano runs Pomp Investments. All views of him and the guests on his podcast are solely their opinions and do not reflect the opinions of Pomp Investments. You should not treat any opinion expressed by Pomp or his guests as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his personal opinion. This podcast is for informational purposes only. Good morning, everyone. Bang, bang. BlockFi, a leading crypto lending company, announced yesterday that they have reached a resolution with the SEC pertaining to the regulatory scrutiny that they have faced over the last eight months. As many of you know, I'm a large

Starting point is 00:04:18 investor in the business, but today's letter is only my personal opinion. I do not speak for the company and nothing below should be attributed to BlockFi or their team. BlockFi's suite of products includes lending against crypto collateral, interest bearing accounts, a crypto exchange, and a credit card that pays rewards in Bitcoin. The company was a pioneer in developing, launching, and scaling a number of these products, but most notably was the interest-bearing accounts and the Bitcoin credit card. Their interest-bearing accounts, known as the BlockFi Interest Account, or BIA, came under regulatory scrutiny during the summer of 2021.

Starting point is 00:04:52 The product is very similar to your checking or savings account at a bank. You deposit funds, the company lends them out to generate yield, and the company shares some portion of the yield with you before keeping the remainder for themselves. The big difference is that the banks pay an average of less than 0.05% nationally, while BlockFi has been paying up to 9% APY with their interest-bearing product. The delta between the legacy world and the crypto world seems steep, right? Well, it is. But there's a simple explanation for how BlockFi and other lenders can pay such high interest rates. There's an imbalance in supply and demand for deposit funds in the market. Quite literally, there are

Starting point is 00:05:29 tens of billions of dollars worth of borrowing demand, but total deposits, the supply, haven't been able to keep up at a similar pace. This imbalance leads to borrowers paying a high interest rate to lenders. Another contributing factor is that companies like BlockFi pass through a large portion of the yield they generate to their customers. For example, your bank makes more than the 0.03 to 0.05% on your deposits, but shares only a small percentage of that yield with you. BlockFi and other crypto lending companies have made a habit of sharing majority of the yield they generate with their customers. So if you combine the imbalance in supply and demand with a large portion of interest yield being passed on to the customer, you can see

Starting point is 00:06:11 why BlockFi can offer up to 9% APY. This comparison to the legacy banks is important for another reason as well, though. The banks are able to offer interest-bearing accounts to their customers without having to register them as securities, nor do the banks have to abide by securities law for that specific product. The general thought process in the crypto industry was that if a company offered interest-bearing accounts with Bitcoin and crypto rather than U.S. dollars, the company would be required to follow the same legal and regulatory frameworks as the banks. As you already guessed, the regulators have a different perspective. The SEC and state regulators took a position that BlockFi is offering a debt security, which would require them to register

Starting point is 00:06:51 the interest-bearing product and operate under securities law. I won't bore you with the negotiation details, but it is safe to say that the regulators and the BlockFi team spent a lot of time discussing various options on how to proceed. The company announced yesterday that they have reached a resolution with the SEC and state regulators. This agreement entails the following. One, BlockFi will register the BlockFi interest account product as a security offering. Two, BlockFi will pay a $100 million settlement. Three, BlockFi will be able to offer the BlockFi interest account to all Americans once the SEC approves the S-1 submission. There are a few aspects of this resolution that I want to cover today. First, various market

Starting point is 00:07:34 participants in crypto have been asking for regulatory clarity for years. This agreement between BlockFi and regulators creates crystal clear regulatory clarity related to interest bearing crypto accounts. Some people won't like the outcome, but that is one of the risks that come with seeking regulatory clarity. Now that the rules around this type of product are clear, every company in the industry will be able to offer this functionality to their users with the confidence that they are playing within the regulatory guidelines. Second, BlockFi's resolution is highlighting an interesting development in the crypto market. They are being asked by U.S. regulators to treat their customers in the United States differently than

Starting point is 00:08:10 their international customers. BlockFi is able to offer a wider range of products and assets to those outside the United States than those within our domestic borders. While they may not seem like a huge deal, my personal opinion is that this trend will create a competitive disadvantage for U.S.-based companies in the crypto industry. Third, the critics of the crypto industry have long claimed that it was opaque, filled with criminal activity, and a systemic risk if there was too much adoption. BlockFi's resolution will create an adherence to the highest degree of transparency, auditability, and risk management that is available in public markets. Regulators will have direct oversight of the product and company, which negates the critics' argument

Starting point is 00:08:53 around opaque operations. Fourth, the $100 million settlement amount is grabbing headlines, and for good reason. This is a record amount for a crypto company to pay in a regulatory matter. It is important to understand that the $100 million is split between the SEC and the various state regulators. Additionally, the current SEC administration has said publicly that they believe past financial penalties were too small because they did not deter market participants from continuing their unregulated activities. My view is that the big number that BlockFi is paying here is the manifestation of the SEC's view that penalties in crypto will only grow in size moving forward. Fifth, it must be explicitly stated that BlockFi is pioneering a way for

Starting point is 00:09:37 American citizens to earn up to 9% APY in a regulatory compliant way. There are a lot of individuals, organizations, or institutional investors that have sat on the sidelines waiting for regulatory clarity. Now these investors will have the opportunity to benefit from high-yield interest-bearing accounts, which has increasing importance in a high-inflation environment. The positive impact on portfolios with a product like this can't be understated. Sixth, the BlockFi resolution showcases the maturity of the business. In order to succeed in the crypto industry, companies are going to be required to have expertise in technology, finance, and regulation. Most teams have native experience in technology and finance,

Starting point is 00:10:16 but BlockFi's ability to navigate this regulatory environment will likely serve them well as they continue building out one of the leading businesses in the industry. Everyone, from customers to public market investors, are likely to have increased confidence in the companies that can build the regulatory muscle needed to thrive in a fast-paced, ever-changing industry. Lastly, if regulators are willing to engage with centralized, well-funded companies like BlockFi, then the industry must realize that the decentralized offerings will come under pressure as well. Many of these platforms are referred to as DINOs by regulators, which stands for decentralized in-name only. This belief that the decentralized platforms are actually

Starting point is 00:10:54 centralized operations would suggest that regulators have plans to pursue these teams and bring them within their regulatory purview. This is essential to understand because true decentralization is likely to become more and more important over time. The BlockFi situation is a watershed moment for the crypto industry. It is clear that regulators are not playing around and the market is going to become bifurcated. One group will represent those who want to work with regulators, and the other will represent those who want to fight the regulators. Either strategy can be appropriate depending on the situation and details. BlockFi has chosen the path of working with regulators to pioneer regulatory clarity for one of the most exciting

Starting point is 00:11:32 parts of the crypto industry. Clarity reduces risk. Reductions in risk lead to increased market participation. Increased market participation creates maturation of the industry. Slowly, but surely we continue to push these innovative technologies into the hands of hundreds of millions of people around the world. I hope that this provided clarity around the BlockFi situation and I hope that it gives you some things to think about moving forward. Thanks so much for listening to today's episode. I really hope you guys enjoyed this one. Make sure you're subscribed on Apple, Spotify, or your favorite podcast player. And if you're looking to try to transition to get a new job in the Bitcoin or crypto industry, we've got you covered.

Starting point is 00:12:11 head over to palmscryptocourse.com we've developed a curriculum with the top teams across the industry it's a three-week intensive training program with over 50 events packed into that three-week time period go to palmscryptocourse.com to learn more and i'll meet you guys for the next episode

The Pomp Podcast - #828 BlockFi's $100M Settlement Explained

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