The lending business is simple and is the core of the existing banking industry. But, when it comes to interests in US dollar deposits, they are only offering around 0.05 percent. Crypto lenders changed this game by offering substantially high interests against crypto deposits, sometimes north of 10 percent.
These crypto lenders act as a middle man (just like banks): they take digital assets as deposits from borrowers and then usually lend them to institutions. Because of the gap in the supply and demand of digital assets, institutional clients are willing to pay very high interests. Crypto lending platforms take a cut of this interest and give the rest to the borrowers.
Crypto lending platforms, like BlockFi, Celsius and Nexo, have become very popular over the past few years. Demand for their services has soared among retail digital asset holders.
But, unlike the banking industry that is heavily regulated, these crypto lending platforms are operating in an unregulated market without any regulatory oversight.
“Generally, in order for an institution to lend or borrow the US dollar, it requires very strict regulation and licenses. These regulations were designed to protect the general public from problems, such as monetary losses and money laundering to name a few. With crypto, these types of regulations have yet to exist,” said Giorgi Khazaradze, the CEO at Aurox.
A Landmark Settlement
Most of the popular lending platforms are centralized and are not required to report their activities to a government body. Being private entities, all of their business is being done behind closed doors.
These companies were already under the radar of the US regulators, both federal and state. It became prominent after BlockFi confirmed a $100 million settlement with the Securities and Exchange Commission (SEC) and 32 state regulators. The crypto company was ordered not to open any new customer accounts in the US until it gains SEC’s approval.
Interestingly, BlockFi’s Founder and CEO, Zac Prince said that the massive settlement was “a win not only for BlockFi but for the broader cryptocurrency industry.” But how?
Well, it kicked off the possibility of introducing regulations in the crypto lending space. The SEC earlier threatened Coinbase with legal actions that forced the crypto exchange to shelve its plans to launch an interest-bearing account, but the regulatory approach was different with BlockFi.
In addition, the crypto lending firm received a 60 day period to meet the requirements of the SEC's Investment Company Act. Moreover, it has to register future lending products with the agency.
Speaking on the regulatory stance towards crypto lenders, TrustToken’s Compliance Officer, Teresa Anaya, said: “I think it does need to be regulated with thoughtful rules and clear guidelines, and regulators need to maintain a sincere and fair dialogue with the industry to enable some sort of sandbox ability to build within guardrails. Too many protocols remain reluctant to work with official bodies for fear of aggressive shutdowns, even though they are themselves making an honest effort to adhere to regulations.”
Future of Crypto Lending
The settlement of BlockFi with the SEC has opened the gates of regulation. But, it is also prompting other companies to rethink the terms of their interest-bearing accounts. After BockFi’s settlement, its competitor Nexo stopped paying interest on new crypto deposits.
So, can companies continue to offer interest-bearing crypto accounts in the US? “It can, and it still does,” Khazaradze said. “Centralized services will probably have to figure out how to properly register in the United States before reopening their services, but decentralized services such as AAVE and Compound are still offering interest-bearing solutions.”
What we can expect in the near future is more such settlements or companies aligning their products with existing regulations. As long as they follow already established securities and lending regulations, any crypto company can offer such products.
But, these companies could face a slow regulatory approach that might cripple their businesses.
Business Is Good Outside the US
While the US always leads the global financial markets, the regulators in the county fall behind when it comes to crypto rules.
“The US was not moving fast enough, and other countries took the lead by creating sandboxes (Singapore), while yet others developed their own regulatory regimes for crypto (Switzerland, UK). It’s going to continue to be very confusing for those involved in digital assets, especially legal counsel and compliance teams, as regulations will be different in all jurisdictions,” said Anaya.
“Digital assets are immediately global, and a global standards body should create a risk assessment regime amenable for all countries to follow. As new innovations come to market, we can conduct risk assessments and develop controls, so innovation can move forward.”
