State of California’s DFPI Takes Action to Suspend BlockFi as Cryptocurrency suffers a major setback as $16 Billion “Evaporated”

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Image courtesy of BlockFi



As 2022 winds down, the realm of digital currency received a major setback as California’s Department of Financial Protection and Innovation (DFPI) has issued a notice to suspend BlockFi Lending LLC’s under California Financing Law lender license regulations. The suspension of BlockFi is for 30 days pending the Department’s investigation into BlockFi’s recent announcement to limit its platform activity including pausing client withdrawals.

The DFPI is the agency responsible for administering the State of California’s lending and banking laws. It extends to the recent California Consumer Financial Protection Law and the state’s securities laws, which also governs broker dealers, investment advisers, and commodities.

Posting an official announcement yesterday to the public on social media, BlockFi stated. “Given the lack of clarity on the status of FTX.com, FTX US and Alameda Research, (a principal cryptocurrency trading firm) we are not able to operate business as usual.”

This set off an alarm at The DFPI and elsewhere which prompted the suspension. Yet as the press office at The DFPI points out, more than six months earlier back in February of this year, DFPI  Commissioner Clothilde “Cloey” V. Hewlett ordered BlockFi to desist and refrain.

Based upon collected information and observations, she ordered that BlockFi cease from offering or selling unqualified, non-exempt securities in the form of BlockFi interest accounts in California.

Apparently, BlockFi is just as surprised and startled by the sudden reversal of fortune as it were of Samuel Bankman-Fried. At age 30 Bankman-Fried is an American entrepreneur and investor. He is the founder and former CEO of the mentioned FTX, a cryptocurrency exchange, and FTX.US, its U.S. affiliate. Bankman-Fried had managed assets through Alameda Research. Alameda is described by analysts as a quantitative cryptocurrency trading firm, which Bankman-Fried founded in October 2017.

In a five year span, Bankman-Fried was able to acquire/build a fortune estimated at $16 Billion. As reported by CNN that fortune “evaporated” in less than a week.

For those unfamiliar with the concept of digital currency or ‘Cryptocurrency’ as it is known. It has several different type of names such as Bitcoin, Litecoin, and Ethereum.

According to finance study experts at Oswego State University of New York,  cryptocurrency is a digital currency, which is an alternative form of payment created using encryption algorithms. The use of encryption technologies means that cryptocurrencies function both as a currency and as a virtual accounting system.

Use of cryptocurrencies requires a cryptocurrency wallet. Such a ‘wallet’ is usually a software or app. They are a tool to hold encryption keys, verifications of identity, etc. A crypto-wallet can be either stored on computer or in cloud-tech based service.

Because cryptocurrencies are still new, there are risks involved in using cryptocurrencies. Oswego State University lists the following:

Various types of cryptocurrencies don’t need banks or any other third party to regulate them.

They tend to be uninsured and are hard to convert into a form of tangible currency (such as US dollars or euros.)

Because cryptocurrencies are technology-based intangible assets, cryptocurrencies can be hacked like any other intangible technology asset.

Consequently, Oswego State University notes that since cryptocurrencies are held in a digital wallet, if a wallet is compromised, lost (meaning access to it or to crypto-wallet backups fails) an individual’s entire cryptocurrency investment is gone.

While precise details of how Bankman-Fried’s assets “evaporated” are still unknown, it seems a possible indication is expressed in BlockFi’s statement. “We are shocked and dismayed by the news regarding FTX and Alameda. We, like the rest of the world, found out about this situation through Twitter.”

Why Bankman-Fried didn’t communicate directly with BlockFi and others in his network is at present unknown. Observers, like those at capital.com, report that Bankman-Fried’s dealings were complicated and “secretive,” in that Alameda depended on its sister firm’s token rather than fiat currency or third-party cryptocurrency sparked large numbers of investors to flee FTX.

“I truly hope people take this as another lesson not to take investing advice from influencers,” said independent economics writer, Joseph ‘Joey’ Politano. He posted his skepticism on Twitter. “FTX, BlockFi, and a lot of these now-bankrupt crypto-companies were massive online advertisers and had so, so many relationships with celebrities and content creators.”

As electronic banking has become a standard in our 21st Century, the concept of cryptocurrency will no doubt be vetted more carefully. How cryptocurrency plays out going forward further into the 21st Century is difficult to say.

“If still standing, we have to navigate the land mines of Celsius, 3AC, FTX, BlockFi, and Voyager. Unbelievable, said Ian Balina, the CEO of Token Metrics. “We’ll need time to heal from this,” Balina posted on Twitter.

Image courtesy of CA DPFI

The DFPI takes its oversight responsibility very seriously. “We expect any person offering securities, lender, or other financial services provider that operates in California to comply with our financial laws, said Commissioner Hewlett. For those impacted by these cryptocurrency events, consumers are advised to please contact the DFPI online. Or, call toll-free at (866) 275-2677.