What BlockFi’s SEC deal means for the rest of crypto
Good morning, and welcome to Protocol Fintech. This Monday: BlockFi’s SEC settlement sets an example, Goldman Sachs offers its first bitcoin-backed loan, and the J5 tells you about NFT red flags.
Clear crypto rules, fair markets and innovation. Pick two.
Some hailed BlockFi's settlement with the SEC as a groundbreaking move to start regulating the crypto sector through enforcement. But there's a strong undercurrent of dissent, beginning at the commission itself.
There are huge stakes. There was nearly $60 billion in crypto locked in DeFi credit contracts as of September, according to a recent IMF study. There’s also a large amount of lending using crypto as collateral, catering both to hedge funds placing big, leveraged bets on digital assets and to wealthy individuals who would rather HODL than liquidate and pay taxes on their appreciated coins.
The crypto world needs to pay attention. It’s not just lenders that should be concerned, because rules or precedents set in the BlockFi case could easily be broadened.
- BlockFi was an easy target for the SEC, because it’s a third party holding customers’ crypto assets and using them to generate yield, part of which it shares with those customers as “interest.” But crypto lending can also be conducted on a peer-to-peer basis through smart contracts. If the same regulations are applied to centralized lenders and decentralized exchanges, the consequences could be far-reaching.
- Costs are a concern, too. An ostensible way crypto lending offers better yields is cutting out administrative overhead. According to Banking Exchange, the global financial services industry spent $180 billion in compliance costs in 2020. Crypto may find it hard to sustain its rates if it bears similar costs.
Regulation of some sort is coming. It’s just a question of what it looks like.
- Policymakers and regulators are getting serious about imposing KYC and AML rules on crypto, and the industry is developing some clever and efficient ways to comply using blockchain technology.
- Inflexible, traditional rules could well drive crypto customers attracted to crypto lending’s high yields back into the Wild West of unregulated peer-to-peer exchanges.
- The flip side is that crypto being seen as unsafe — as hackers run wild on poorly secured, decentralized systems — could sour consumers on cryptocurrency altogether.
Gary Gensler’s “regulation through enforcement” approach is drawing more critics every day. Some are questioning whether BlockFi should have settled, rather than fight as Ripple is doing.
- Inside the SEC, Commissioner Hester Peirce has emerged as a key voice for a different approach to regulation. She disagreed with the BlockFi ruling, asking her colleagues whether “the approach we are taking with crypto lending [is] the best way to protect crypto lending customers.”
- As Protocol Fintech has noted, much of crypto lending is happening outside the kind of entities the SEC has regulated in the past. Traditional finance — TradFi — happens on networks operated by a bank, exchange or money transmitter. Chase, the NYSE and PayPal all have their various regulators.
- Crypto transactions are often global. International money flows are relatively small and heavily regulated. How do numerous national regulators in their geographic stovepipes oversee a global, peer-to-peer marketplace that runs 24/7 on automated systems?
There are already examples of the harm of knee-jerk regulation. Remember initial coin offerings?
- Jill Grennan, an assistant professor at Duke University’s Fuqua School of Business, observed in a recent paper that most regulators either ignore or misunderstand the economic purposes of financial innovations, overweighting the risk of facilitating fraud and undervaluing the benefits of a new means of capital formation.
- Economists Chris Brummer and Yesha Yadav call the crypto situation a “trilemma.” In a 2019 paper, they wrote that when regulators try to “provide clear rules, maintain market integrity, and encourage financial innovation,” they usually end up providing two out of three at most.
- One example: The Bank Secrecy Act requires transaction reports and customer identification to fight money laundering. The crypto industry is struggling to figure out how to apply this to a marketplace where customers can preserve their own anonymity by using self-custodied wallets.
It would be smart for the SEC to show publicly that it’s taking its internal and external critics more seriously. Peirce argues that regulators should work harder to develop a “bespoke set of conditions that make sense in this context.” And she asked her agency to do a better job of accommodating innovation. There’s a way out of the trilemma: It’s called doing the work.
— Leah Zitter (email | twitter)A MESSAGE FROM CHECKOUT.COM

The emergence of DeFi is shaking up the way consumers think about how they store value. For reference, Visa saw $2.5 billion of crypto-backed transactions in the first quarter of 2022. We’re seeing consumers really starting to use this in a way that even a year ago was kind of hypothetical.
On the money
Samsung is planning to list its first crypto ETF in Hong Kong. The listing will reportedly be the first ETF listed in Asia to include cryptocurrencies, a major move for the largest asset management firm in South Korea.
Goldman Sachs offered its first bitcoin-backed loan. The cash loan was collateralized using bitcoin owned by the borrower, and it’s a significant step in traditional banks embracing the digital asset industry.
Coinbase wants to improve its asset listing processes. Most notably, some very smart people have taken a close look at the company’s on-chain data and API responses, prompting a plan to remove information asymmetries.
The J5 released a report on NFT red flags. The Joint Chiefs of Global Tax Enforcement categorizes warning signs as “strong” or “moderate” indicators of NFT fraud in an effort to warn the public of high-risk NFT activities.
Crypto firms are poaching cops left and right in the U.K. Major crypto exchanges like Coinbase, Binance and Chainalysis have been hiring former cybercrime experts and regulators, often offering them about double or triple the pay.
Overheard
Ophelia Brown, founder of VC firm Blossom Capital, thinks that the Bored Ape metaverse project could set a precedent. “It feels to me like the success of Web3 games ultimately rides on whatever happens with Otherside. If this falls flat, it feels like all of this was just a lot of speculation and hype,” Brown said in an interview with the Financial Times.
The Swiss National Bank isn’t hedging its bets on bitcoin just yet. "Buying bitcoin is not a problem for us … we can arrange the technical and operative conditions relatively quickly, when we are convinced we must have bitcoin in our balance sheet. We do not believe bitcoin meets the requirements of currency reserves," Chairman Thomas Jordansaid at the SNB annual meeting.
Coming up
The DeFi Retreat 2022 takes place Tuesday. Held in San Diego, California, the event is hosted by Michelle O’Connor, TaxBit’s VP of Marketing and Communications, and features speakers from the Celsius Network, Consensys, TRM Labs and others.
Paycom’s earnings call is set for Tuesday. PAYC’s average estimated EPS is at $1.42, up 73% from last quarter.
The U.S. Fintech Symposium starts Tuesday. The two-day conference will be held in Orlando, Florida, and will feature speakers from Block, Microsoft, Mastercard, Citi Ventures and others.
The U.S. Senate Banking committee has a hearing Wednesday. It will be on overdraft fees and their effects on working families.
What does tech regulation beyond Big Tech look like? Join Protocol’s Ben Brody and a panel of experts on Thursday, May 5 at 10 a.m. PT/1 p.m. ET to dive into the biggest regulatory priorities of the not-quite-biggest tech companies.
Block, Shopify and Bill.com’s earnings calls are slated for Thursday. SQ’s average estimated EPS is at -$0.18, down 64% from last quarter. SHOP’s average estimated EPS is at -$0.32, down 152% from last quarter. BILL’s average estimated EPS is at -$0.61, down 61% from last quarter. So, should be a fun week!
A MESSAGE FROM CHECKOUT.COM

Businesses — whether Web2 or Web3-oriented businesses that don’t want to hold crypto but do want to be able to interact with crypto holders — want to be able to offer that as a payment mechanism to their communities. The other is hands-on, where merchants are comfortable accepting crypto.
Thanks for reading — see you tomorrow!
Recent Issues
Did the FTX crash vindicate Gensler?
November 15, 2022
Crypto isn’t as transparent as it claims
November 14, 2022
The crypto contagion is spreading
November 10, 2022
FTX’s collapse has rattled the crypto industry
November 09, 2022
The silver lining in rising rates
November 08, 2022
The real estate slowdown is getting real
November 07, 2022
See more
To give you the best possible experience, this site uses cookies. If you continue browsing. you accept our use of cookies. You can review our privacy policy to find out more about the cookies we use.