In a recent regulatory action, the California Department of Financial Protection and Innovation (DFPI) permanently revoked BlockFi’s lending license two years after bankruptcy. This decision follows an extensive review and agreement that prohibits BlockFi from engaging in what DFPI deems “unsafe practices.” This BlockFi license cancellation incident serves as a warning signal to other financial companies.
License revocation and violations
DFPI’s investigation into BlockFi found that the platform violated key provisions of the California Financial Services Law (CFL). According to regulators, BlockFi’s lending practices were deficient in several areas, including failing to assess borrowers’ ability to repay before approving loans, charging upfront interest, and inaccurately displaying annual interest rates. Additionally, BlockFi failed to provide consumer credit counseling and failed to report repayment history to credit bureaus, further worsening their position. Following the move to revoke BlockFi’s license, many are questioning the future of the digital lending platform.
DFPI has made it clear that this action is a necessary step to strengthen California’s consumer protection laws. “We welcome financial innovation, but companies must prioritize compliance with the law and consumer protection,” said DFPI Chair Clothilde Hewlett, emphasizing the importance of balancing innovation and consumer safety. With the BlockFi license revoked, DFPI aims to send a strong message.
Settlement Terms and Financial Penalties
As part of the agreement, BlockFi accepted permanent license revocation and agreed to a $175,000 fine. However, in light of BlockFi’s ongoing bankruptcy proceedings, DFPI waived the fine payment so that the platform could focus on repaying consumers.
BlockFi’s tumultuous journey following the FTX collapse
BlockFi’s financial difficulties and eventual bankruptcy were largely influenced by the collapse of FTX in late 2022. FTX’s bankruptcy left BlockFi with significant debt obligations and created a difficult financial environment. BlockFi’s lending exposure to FTX US totaled $275 million, and it also extended a $400 million line of credit to FTX. The recent announcement of BlockFi license cancellation has further compounded the company’s woes.
Related: With court nod, BlockFi moves closer to repaying customers.
Despite this setback, BlockFi attempted to return some crypto assets to users through Coinbase in a temporary distribution plan earlier this year. However, the company shut down its web platform in May 2024, permanently ending user access to the service.
The future of digital lending regulation
This case highlights the increasing focus regulators are placing on protecting consumers in digital asset lending. California’s strict stance reflects a growing trend of increased scrutiny of cryptocurrency platforms to comply with traditional financial regulations. DFPI’s actions could set a precedent that highlights the need for rigorous compliance as the digital financial landscape continues to evolve.