BlockFi is facing a regulatory boom. Is this a sign of possible crypto loan regulation?

As state regulators in the United States begin to crack down on the company’s encrypted interest-bearing accounts, BlockFi’s troubled 2021 will continue in the second half of the year. This move may mark another operational problem for the non-bank lender in its massive fund-raising and public listing plan due to disputes and technical errors during the year.

State regulators that track crypto interest-bearing accounts may also become the vane of possible federal regulations for the cryptocurrency loan market. In fact, given the current concerns about U.S. digital currency regulations, this situation may be possible.

From reducing centralized crypto lenders, the focus of attention may shift to decentralized counterparts, especially in Rhetoric like “Financial 9/11” Members of Congress blamed it on Decentralized Finance (DeFi).In fact, MakerDAO founder Rune Christensen recently warn US suppression of the industry will be a “own goal”, 10 times more severe than China’s reported suppression of private-sector technology giants.

Stop and stop

In July alone, BlockFi received suspension and termination notices from three states in the United States. Regulators in New Jersey, Alabama and Texas accused the company of offering unlicensed securities.

According to reports, this seemingly coordinated regulatory review depends on BlockFi’s crypto savings and loan products, in which users can deposit their cryptocurrency into an interest-bearing account, called a BlockFi interest account (BIA), and use the same as collateral To get a loan. Regulators in these states stated that the product constitutes an issuance of unlicensed securities.

It all started with the New Jersey Securities Bureau in early July Issue a stop order to BlockFi, Ordered the company to suspend opening new accounts. The order was originally scheduled to take effect on July 22, but it was postponed for a week, and now it has been postponed for another month due to ongoing negotiations between BlockFi and New Jersey regulators.

In a statement Publish On the company’s website, BlockFi CEO Zac Prince (Zac Prince) assured customers that the company will continue its dialogue with regulators. Prince pointed out that the New Jersey Securities Bureau’s decision to postpone action against BlockFi is a trust in the company’s efforts to overcome current regulatory obstacles.

Alabama soon Show reason command, Claiming that BlockFi funded its crypto lending activities by selling unlicensed securities. From the date of notification, the company has 28 days to provide reasons why it should not be served with a stop order as in New Jersey.

As previously reported by Cointelegraph, Texas also Joined the regulatory campaign against BlockFiThe Texas Securities Commission plans to hold a hearing in October to decide whether to prohibit BlockFi from providing crypto lending services in the state.

As in the cases of New Jersey and Alabama, Texas regulators stated that the fact that BlockFi operates as an encrypted business does not exclude it from being subject to securities laws.In another statement on its website, BlockFi has come out disagree BIA is the concept of securities.

According to Prince: “Ultimately, we see this as an opportunity for BlockFi to help define the regulatory environment for our ecosystem.” As early as June, the CEO of BlockFi argued, The regulatory interest is Net benefit to the crypto ecosystem.

Is the crypto lending market receiving attention?

BlockFi’s current regulatory issues have also brought about a bigger problem, that is, crypto lenders seem to be subject to stricter scrutiny by regulators. Judging from the exact wording contained in the notices issued by the states of New Jersey and Alabama, it appears that regulators in these states classify BIA as a product rather than an account.

Although it is a non-bank entity, there is a view that BlockFi provides a common savings account similar to that provided by banks-although in BlockFi’s case, Bitcoin (Bitcoin), ether (Ethereum) And stablecoins. By mixing user deposits, the company is able to provide loans to retail and institutional customers.

The annual return rate of stablecoins linked to the US dollar is as high as 8.5%, and the annual return rate of BTC deposits is about 4%, which is several orders of magnitude higher than 0.03%. average Used for U.S. savings accounts. In addition to high interest income, depositors can also use their encrypted deposits to obtain loan facilities.

By treating BIA as a product, regulators in New Jersey and Alabama may declare that BlockFi’s interest-bearing crypto lending accounts are eligible for securities. At the same time, this designation is usually not granted to a certificate of deposit (CD) account, although the latter behaves in roughly the same way as securities under the definition specified in the Securities Act of 1933.

However, it is important to note that these actions are based on unique state laws and may not be related to federal authorization. The diversity of U.S. jurisdictions often leads to intricate regulations in various states, which is a common compliance barrier for crypto companies and the broader financial technology industry.

Therefore, due to the lack of federal directives that may provide some form of pre-emption rights, BlockFi and cryptocurrency lenders may soon be dealing with more onerous state laws. In a conversation with Cointelegraph, Dean Steinbeck, President and General Counsel of Horizen Labs, a blockchain development company, stated that regulatory actions against companies such as BlockFi are inevitable, adding:

“Unfortunately, I think it is only a matter of time before the federal regulators hunt down centralized’crypto banks’ that provide users with fixed crypto deposit interest. Regulators may choose to use these investments as unregistered securities issuance or illegal banking activities, depending on The specific agency that decides to pursue these claims.”

Commenting on the possible ways of such regulatory actions, Steinbeck stated that since interest-bearing tools are “already well-regulated products”, there may be no need to formulate special legal policies for their cryptocurrencies. Steinbeck added: “The regulator only needs to clarify the regulatory regime that regulates these types of cryptocurrency deposits and loans.”

So far, the US Securities and Exchange Commission has restricted its supervision and participation in the field of crypto lending to Investigation and prosecution of a few companies Operate in the market. However, as some members of Congress pay more and more attention to the cryptocurrency industry in the United States, the U.S. Securities and Exchange Commission’s ruling on whether crypto loan “products” are securities may become possible in the future.

BlockFi’s eventful 2021

Crypto lending began to rise in 2019, and it can be said to be one of them before the DeFi summer of 2020 The fastest growing market in the entire crypto industryAccording to reports, BlockFi manages more than $14.7 billion in assets in its encrypted interest-bearing accounts, with a valuation of approximately $3 billion. US$350 million in Series D financing Come back in March.

In June, the company announced another round of investment plans by major backers and private investors, whose valuation may be close to 5 billion U.S. dollars. Earlier this year, as the Bitcoin and cryptocurrency markets soared to new price highs, BlockFi customers seem to be receiving record interest payments About their cryptocurrency and stable currency deposits.

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However, the company has not been smooth sailing in 2021, and there have been several incidents that can be described as public relations nightmares.Before the company’s $350 million funding round in March, it was reported that there were approximately 500 customers Victims of racism and vulgar email attacks. in May, The company mistakenly sent an overpayment The winners of the promotion, some allegedly received hundreds of bitcoins.

BlockFi’s regulatory enthusiasm in the second half of 2021 also coincides with the company’s low activity in the flow of funds to and from miners and exchanges.Data flowing between entities from the on-chain analysis platform CryptoQuant show BlockFi has the least activity with miners and cryptocurrency exchanges last month, and the company’s reserves are at the lowest level since the first quarter of 2020.

According to reports, BlockFi has raised hundreds of millions of dollars in several rounds of financing and is considering a public listing to join the ranks of publicly traded cryptocurrency companies with a market value of billions of dollars. It is not clear how current regulatory issues will affect the company’s listing application.