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This week, the Arizona Corporation Commission issued a warning to investors about digital-asset financial services companies that offer interest-bearing crypto-asset accounts.
According to the Commission, 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 Corporation Commission’s Securities Division warns investors that some crypto-interest account providers may not have adequately disclosed the risks that customers face when they deposit crypto assets onto these platforms. Some companies may materially overstate the degree to which their collateral practices protect their ability to pay investors the stated return.
In a recent action against BlockFi Lending, LLC, the Commission found that certain crypto-interest accounts were unregistered securities. The purpose of securities registration, in part, is to ensure that investors receive all material information needed to evaluate whether to enter into these crypto-interest account arrangements, such as risks being taken with deposited funds.
The Commission is investigating whether other crypto-interest account providers are violating laws under the Commission’s jurisdiction.
The Commission advises that there are other risks investors should know about a crypto-interest providers:
They are not governed by the same rules and protections as banks and credit unions, which are required to have deposit insurance.
They are unpredictable, volatile, and sometimes illiquid.
They might become insolvent or go bankrupt.
Their crypto assets may not be tradable anywhere.
There may be changes in regulation that could restrict use and exchange of the digital asset.
Their platforms may be subject to theft, technical glitches, or hackers.
They may be located outside of the United States so your ability to take legal action may be limited or subject to foreign laws and rules.
The Corporation Commission urges investors to be cautious before responding to any solicitation offering a return on digital assets. Investors can find a list of companies and individuals that have been sanctioned or are currently facing sanctions for crypto-related investment activity at the Securities Division’s enforcement section of its website.
Arizona crypto-interest account investors may file a complaint with the Commission’s Securities Division at www.azcc.gov/azinvestor.
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