Regulators arrive for massive crypto lending industry

'A wake-up call': regulators arrive for massive crypto lending industry

Image: Bloomberg / Contributor via Getty Images

This week, three states took regulatory action against cryptocurrency savings and credit service BlockFi, with New Jersey, Alabama and Texas each alleging that the company sells unregistered securities with its service that allows users to earn interest on crypto holdings. BlockFi is one of the largest and most well-known entities in the emerging multi-billion dollar crypto lending industry.

Even though cryptocurrency is entering the mainstream, the industry still looks like the Wild West in some ways. It’s true of wacky and experimental tokens and blatant scam projects, but also regulations. Decentralized finance (DeFi) and cryptocurrencies are still so new that the legality of some products and services remains uncertain, and regulators are trying to catch up with the rapidly changing industry. Crypto regulations are on the rise, especially in Europe and China lately, and it’s taking root in the United States too.

BlockFi is the latest target. The problem is BlockFi’s main product offering: the BlockFi Interest Account, which allows users to deposit Bitcoin and other cryptocurrencies and earn interest on their holdings. This is akin to the practice known as “yield farming,” a staple of the emerging DeFi ecosystem, in which investors “lock in” their own money to support some aspect of the entity paying them. a dividend.

In BlockFi’s case, it looks a lot like a traditional bank savings account for Bitcoin, Ethereum, and other crypto coins, except with much higher returns than a typical savings account. Clients’ deposited assets are mixed with those of other users, which BlockFi then uses to offer loans to retail and institutional clients. Currently, you can earn up to 8.5% annual interest depending on the dollar-indexed cryptocurrency or stablecoin in question (bitcoin can go up to 4%), with interest calculated monthly and compounds over time. Users can also borrow for their own coins with BlockFi and take out a loan without selling their crypto.

BlockFi was a forerunner in the space and is the best known, although it is no longer the only one: Gemini Earn, Celsius Network, and Canada’s Ledn are other popular services offering crypto interest accounts. Amid this explosion, these crypto accounts have become a popular option for investors looking for high returns. On the Modern finance podcast in May, BlockFi CEO and co-founder Zac Prince said the company had more than $ 20 billion in assets on the platform and paid customers $ 60 million in interest during the month previous.

“We think our team and our investors, and the regulations, and being based in the US, is a pretty good way to mitigate [fraud]Prince said on the podcast of BlockFi’s approach to risk management. “The United States is great at law enforcement.

It is essential to note that while BlockFi is sometimes equated with the DeFi movement, it is actually a centralized company that manages decentralized blockchain-based assets rather than a decentralized financing project itself. This is because it does not rely on automated smart contracts to manage transactions and manage assets. DeFi services offer other ways to generate a return on crypto holdings, such as earning rewards by throwing tokens into a blockchain network or providing liquidity to a decentralized exchange (DEX) like Uniswap. Some centralized crypto exchanges, like Coinbase and Binance, also pass staking rewards to customers.

So why are regulators focusing on BlockFi? The question that arises here is whether these interest accounts should be treated as collateral, which means that they should be registered and regulated as such. New Jersey was the first to act on Monday, as its attorney general put it a cease and desist order to BlockFi claiming he violated state securities law. The order said BlockFi was to stop accepting new customers in New Jersey effective July 22, although the company may continue to serve existing customers for now.

Alabama followed suit on Wednesday, with its securities commission issuance of show cause order– effectively demand that BlockFi justify why the State should not issue a cease-and-desist order similar to that of New Jersey. Finally, Texas entered the fray on Thursday, with the state’s State Securities Board issuing its own notice of hearing regarding a cease and desist order by BlockFi and its affiliates regarding alleged unregistered securities offerings. Texas regulators alerted BlockFi to its alleged violations in April and the hearing is scheduled for October.

“We are in active dialogue with several regulators to demonstrate that the BlockFi Interest Account (BIA) is not a security and should not be regulated as one,” the company tweeted yesterday, following the filing of the file in Texas. “We strongly believe that BIA is legal and appropriate for participants in the crypto market, and we remain firm in our commitment to fight for the rights of consumers to earn interest on their crypto assets.”

The United States Securities and Exchange Commission (SEC) has yet to weigh in on the matter, although it could happen. Crypto lawyer Preston Byrne, partner at Anderson Kill, tweeted through legal theory behind the BlockFi situation on Thursday, and wrote, “At this point, there is no way the Feds are staying away.”

In one editorial for CoinDesk, Byrne explained what increased regulatory oversight could mean for BlockFi. If the company is forced to register its BIA accounts as a security product, then it could “significantly limit availability” for US customers, including potential disruption in some states or across the country. Still, he suggested this was a “fundamentally more borderline case” than the situation the SEC faced after the initial coin offerings (ICOs) exploded in 2017, leading to a wave of action. regulatory.

Even so, the application threat could have a chilling effect on the entire cryptocurrency service industry.

“Crypto is a new asset class and regulators have considerable discretion in deciding where and when to take enforcement action,” Byrne told Motherboard. “The pending execution notice against BlockFi will be interpreted by other companies offering similar products as a wake-up call. They likely speak with their lawyer, assess the risk that their offers will also be found to be non-compliant, and make decisions about whether to discontinue those offers. “

Even in the midst of such pressure, BlockFi shows no signs of slowing down its expansion. The company recently launched a Bitcoin rewards credit card and is raised $ 500 million Round table series E for a valuation of nearly 5 billion dollars. BlockFi is also reportedly considering a takeover bid for shares, by CoinDesk, with plans to roll it out in 12-18 months.


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