(Bloomberg) -- BlockFi Inc. is being scrutinized by the U.S. Securities and Exchange Commission over its popular product that pays customers high interest rates for lending out their digital tokens, a development that significantly ratchets up the fast-growing crypto firm’s legal woes. 

The SEC review focuses on whether the BlockFi accounts are akin to securities that should be registered with the regulator, according to a person with knowledge of the matter. The Jersey City, New Jersey-based firm touts annual yields as high as 9.5% on its website -- a figure that dwarfs the 0.06% average interest rate for bank savings accounts. States including New Jersey and Texas have already taken action against BlockFi, questioning whether it’s marketing illicit financial products that lack bedrock consumer protections. 

BlockFi, a private company with more than 500,000 retail accounts, was recently valued at more than $4 billion. Backed by Wall Street titans including Bain Capital and Tiger Global Management, the firm offers a suite of financial services to crypto investors, including trading accounts and loans that allow customers to borrow money against their virtual tokens. The SEC hasn’t accused BlockFi of any wrongdoing and not all agency investigations lead to enforcement actions. 

Spokespeople for BlockFi and the SEC declined to comment.

Read more: What’s Crypto Lending and Why Are Regulators After It?  

SEC Chair Gary Gensler has loudly asserted in a series of speeches that he believes many crypto firms are selling products that should be registered with the agency, which would subject them to much stricter oversight and rules. 

SEC Warning

The SEC’s argument is that when a consumer invests their money “in a common enterprise” and expects to profit, then they’ve entered into an investment contract that the regulator has authority over. The industry was put on notice of the SEC’s hard line in September when Coinbase Global Inc. disclosed that the agency had threatened to sue it if it went ahead with a plan to pay users 4% for lending out their cryptocurrencies. 

Read more: Coinbase Drops Crypto Lending Program Plans After SEC Balks

BlockFi and other firms are able to pay high interest rates because they can charge institutional investors that want access to coins even more. The market is one of the hottest corners of crypto, with companies saying they’ve collected more than $40 billion in deposits. 

Since taking over in April, Gensler has repeatedly urged firms offering crypto-lending products to come speak with the agency about how they should be regulated. At the same time, the SEC has been laying the groundwork for a crackdown behind the scenes. 

Over the past several months, the SEC has sent dozens of subpoenas and requests for information to crypto firms, according to people familiar with the matter who asked not to be named discussing private communications. Many of those inquiries have been related to digital-asset lending products, the people said. Some of the requests have been focused on decentralized finance, or DeFi, platforms.

The SEC’s demands vary, but are often focused on the question of whether products fall under its oversight. For example, in one recent subpoena, agency enforcement attorneys asked certain DeFi platforms to explain how their products aren’t securities, according to one person, who asked not to be named because the request was private. 

State Scrutiny

State-level securities regulators have also launched a broad examination of crypto-lending firms including BlockFi. New Jersey’s Bureau of Securities in July demanded that BlockFi cease and desist from offering its accounts, an order whose effective date has been extended to December. Kentucky took a similar action, while authorities in Texas, Alabama, and Vermont told BlockFi to demonstrate why their states shouldn’t ban its lending product. 

A key concern is that unlike bank deposits, the crypto accounts aren’t insured by the federal government. If a firm goes bust, customers could lose their funds.

Read more: Crypto Accounts Yielding 7% Spur Scrutiny as States Warn of Risk

Amid the regulatory scrutiny, J. Christopher Giancarlo, a former chairman of the Commodity Futures Trading Commission, quit BlockFi’s board in August. Giancarlo, who remains an adviser to the firm, declined to comment.

Despite the mounting legal questions, BlockFi is growing at a rapid clip. It’s on pace to make $475 million in gross revenue this year, according to Zac Prince, one of the firm’s founders. “Things aren’t slowing down,” he said during a recent interview for the Bloomberg Financial Innovation Summit that aired on Nov. 5. 

Prince declined to comment on whether the firm was facing a federal probe. On its website, BlockFi says it’s in “active dialogue” with regulators from New Jersey, Texas, Alabama, Vermont and Kentucky and that its products are “lawful and appropriate” for crypto participants.

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