Arizona regulators warn against crypto-backed investments

The Arizona Corporation Commission’s Securities Division warned investors this week that some crypto-interest account providers may not have adequately disclosed the risks that customers face when they deposit cryptocurrency assets onto such platforms.

The warning comes after the ACC in June ordered New Jersey-based BlockFi Lending LLC to pay a $943,396 administrative penalty for offering and selling unregistered securities in the form of interest-bearing digital-asset deposit accounts to Arizona investors.

The consent agreement stemmed from the Arizona agency’s participation in a multistate working group of the North American Securities Administrators Association.

In February, BlockFi agreed to pay a $50 million and halt its sales of the crytpo lending product to settle charges brought by the U.S. Securities and Exchange Commission, and to pay another $50 million to 32 states, including Arizona.

With crypto-interest accounts, customers lend crypto assets to the company and, in exchange, receive interest paid in crypto assets.

However, due to the crypto market downturn, highlighted by the recent bankruptcy filings of Celsius Network and Voyager Digital, some companies are preventing account holders from withdrawing from and transferring between their accounts, the ACC says.

The Corporation Commission also warns that some companies may materially overstate their ability to pay investors promised returns.

The commission says it is investigating whether other crypto-interest account providers are violating laws under the Commission’s jurisdiction.

Among the risks of crypto-interest accounts, the ACC notes that they are not governed by bank or credit union regulations and deposits are not insured; they are unpredictable, volatile, and sometimes illiquid; regulatory changes could restrict use and exchange of the digital asset; and they may be located outside of the United States, potentially limiting investors’ ability to take legal action.