Sometimes challenges to a major decentralized finance asset come not from the federal government, but from a state office.
That’s the case with the Alabama Securities Commission’s condemnation of products marketed by crypto firm BlockFi, reported at Cointelegraph today.
“The ASC said that the action comes amid rising concerns over the growing popularity of decentralized finance platforms like BlockFi, which are designed to provide financial services without relying on central financial intermediaries,” writes Helen Partz.
This motive notwithstanding, you might think that it’s just a case of a flyover state disliking a mercantile intrusion by a Jersey company, except that New Jersey is the other state which has declared BlockFi’s product illegal. (Hilariously, CEO Zac Prince reportedly initially denied any challenge from New Jersey, but was soon forced to acknowledge that regulators had reached him.)
The argument in both cases is that BlockFi has profited from selling unregistered securities.
This argument stands in the shadow of tension between Ripple, with its XRP token, and the US Securities and Exchange Commission, where lawyers are duking it out in SDNY court to define exactly what a security is.
A security is essentially defined as a tradable instrument in corporate equity or debt such as a stock or bond.
Taking criteria from the Ripple case, we see that two major criteria for a security are whether the coin or token in question (or other asset) has utility, and whether the asset is “like” Bitcoin and Ethereum, which the SEC has largely suggested are not securities.
On the first point, one could easily argue that BlockFi’s Interest Accounts are not remotely like Bitcoin or Ethereum.
It’s the second point that gets tricky – is a crypto lending account something with a utility, or is it a tradable asset tied to a firm’s value?
A third argument would be that it’s an asset tied to the value of something that’s not a security, i.e. Bitcoin.
While that’s clear as mud to most people, the regulators are charged with coming up with clear and transparent definitions and guidelines, which they have failed to do, and that’s why these cases are now stuck in court. We’ll keep you apprised of developments.