California Permanently Revokes BlockFi’s Lending License After Bankruptcy

As one of the most progressive states when it comes to digital currencies, California has enjoyed a bustling crypto industry but has also evolved its regulatory approach over time and begun tightening its grip over the industry. As a result, it now takes decisive action against individuals and clients found to not be in compliance with its newer regulations.    

In a recent example of this, California recently took such action against BlockFi by permanently revoking its lending license. This move, by the California Department of Financial Protection and Innovation (DFPI), comes nearly two years after BlockFi filed for bankruptcy. The decision marks a notable step in state regulatory enforcement over failed crypto firms.

As supporters and detractors argue over whether crypto is the future or not, the growing reach of it has been sweeping across many industries unabated for years now. Across sectors like eCommerce, prominent SaaS providers, and the iGaming industry, crypto is now being rapidly adopted as a payment method.

At online crypto casino platforms like LuckyBlock, crypto payments enable some iGaming sites to offer a variety of unique perks. Among these, players have access to benefits like instant withdrawals, registrations that don’t require KYC checks, or even ID verifications in some cases. The decentralized nature of blockchain-based platforms like these have become a massive draw for users who prefer privacy. However, this is also why authorities are so intent on regulating cryptocurrency and blockchain technology too.    

Following the suspension of BlockFi’s license in November 2022, the DFPI conducted a thorough investigation and found multiple violations, ultimately leading to the license revocation. BlockFi, in a settlement agreement, accepted the revocation and committed to ceasing unsafe practices to comply with regulatory expectations.

The growing decentralized finance (DeFi) industry has been a game-changer for the finance world as it enabled blockchain-based financial systems that could be used for crypto-backed lending. For a while, BlockFi appeared to be a giant of this burgeoning sector and was valued at $3 billion at one point.

However, the California regulator revealed that BlockFi had breached several conditions under the California Financing Law (CFL). The company's practices included failing to assess borrowers' repayment abilities and charging interest before disbursing loan funds. According to authorities, part of the company’s infringements were also that it did not report payment performances to the relevant credit bureaus.

In many cases, this caused customers to lose out on potential benefits from responsible loan repayments. In the proper course of events, customers who duly paid back their premiums on loans should have had their credit status enhanced and helped them qualify for other credit services in some cases. This was just one of the ways that BlockFi was found to be in breach of its regulatory duties.

Following these findings, California imposed a $175,000 fine on BlockFi for CFL violations. However, by that point, BlockFi’s was already undergoing bankruptcy so it was instead agreed that the DFPI waive the payment. However, this was to ensure that funds were directed toward consumer reimbursements.

The saga became a massive stain on the crypto industry and its ongoing bids for legitimacy among a never-ending array of skeptical consumers and overzealous lawmakers who want to regulate every aspect of it. Unfortunately, no matter how much advancement and legitimate upgrades the crypto industry brings to modern finance and tech, major scandals like this one are a stark reminder that the industry can’t be given carte blanche as the risk to ordinary consumers will be too great.

Notably, BlockFi had extended a $400 million credit line to FTX US, making it one of BlockFi's largest unsecured creditors, with outstanding debts reaching $275 million. The ripple effect of FTX’s downfall exacerbated BlockFi’s financial troubles, pushing the lender to seek Chapter 11 bankruptcy protection in 2022. In March 2024, BlockFi reached an agreement involving the FTX and Alameda Research estates to settle for $875 million.

This agreement represented an attempt to recover some of BlockFi's losses. Additionally, BlockFi began distributing crypto assets to creditors through Coinbase in July 2024 as part of its restructuring efforts. Nevertheless, the company still owed up to $10 billion to more than 100,000 creditors as of April 2023, underlining the magnitude of its collapse.

California would go on to take decisive action against BlockFi by permanently revoking its lending license. This move, by the California Department of Financial Protection and Innovation (DFPI), comes nearly two years after BlockFi filed for bankruptcy. Following the suspension of BlockFi’s license in November 2022, the DFPI conducted a thorough investigation and found multiple violations, ultimately leading to the license revocation.

BlockFi, once a major player in the crypto lending market, initially faced scrutiny when it filed for bankruptcy in November 2022. The California regulator revealed that BlockFi had breached several conditions under the California Financing Law (CFL). The company's practices included failing to assess borrowers' repayment abilities and charging interest before disbursing loan funds.

BlockFi also reportedly neglected to provide consumers with essential credit counseling. Such failures ultimately demonstrated to regulators that BlockFi was not prioritizing consumer protection, as it also misrepresented loan terms and interest rates.

Regulators further highlighted that BlockFi did not report payment performances to credit bureaus. Such oversight can impact consumers’ credit scores, as they lose out on potential benefits from responsible loan repayments. As a result, the DFPI later stressed that consumer safety remains its top priority, especially as crypto firms experiment with new financial products.

In May 2024, BlockFi made headlines again when it shut down its web platform, leaving clients unable to access their accounts. BlockFi’s downfall was later closely linked to the collapse of FTX, the cryptocurrency exchange founded by the now embattled Sam Bankman-Fried. When FTX filed for bankruptcy in November 2022, BlockFi disclosed significant exposure to the firm, which destabilized its financial standing.

Notably, BlockFi had extended a $400 million credit line to FTX US, making it one of BlockFi's largest unsecured creditors, with outstanding debts reaching $275 million. The ripple effect of FTX’s downfall exacerbated BlockFi’s financial troubles, pushing the lender to seek Chapter 11 bankruptcy protection in 2022.

Considering its past indiscretions, together with its bankruptcy history, the decision has now been taken to permanently revoke BlockFi’s lending license. 

Key Takeaways

• California’s decision to revoke BlockFi’s license underscores strict state-level enforcement over crypto firms.
• BlockFi’s financial missteps and its entanglement with FTX show the interconnected risks in the crypto industry.
• The DFPI’s emphasis on consumer protection sends a clear message to other crypto companies operating in California.
• BlockFi’s bankruptcy and license revocation are cautionary tales for firms prioritizing rapid growth over regulatory compliance.