US Regulators Set Sights on Crypto Interest Accounts

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  • Regulatory bodies are increasingly scrutinizing crypto lenders like BlockFi and Celsius over their interest-generating programs.
  • Regulators claim crypto lending products are securities and should be registered with the SEC.
  • In the latest move, securities regulators from numerous states are inspecting Celsius.

Lately, in a move to catch up with the rapidly developing crypto market and set up a regulatory framework to ensure investor protection, top regulatory bodies have commenced what they call a “crypto sprint.” Ostensibly, this “sprint” has now stretched to crypto interest accounts, scrutinizing crypto lenders like BlockFi and Celsius.

In late July, DeFi lending and savings platform BlockFi witnessed regulatory scrutiny over its BlockFi Interest Accounts (BIAs). Starting with the Alabama Securities Commission (ASC), other regulatory bodies asked BlockFi to clarify why BIAs should not be considered securities.

More recently, on Sept 8, CEO Brian Armstrong unveiled that the US Securities and Exchange Commission (SEC) has warned to sue Coinbase over its yet-to-be-launched Lend program. Following this, it was evident that lending programs are in trouble.

Celsius Under Scrutiny Over Lending Program

On Sept 17, New Jersey’s securities regulator commanded Celsius, a crypto lending firm, to abruptly stop offering interest-earning accounts. On the very same day, the Texas State Securities Board also filed a notice that it will hold a hearing about the allegations related to Celsius Network in February.

Andrew Bruck, New Jersey’s acting attorney general, said that companies operating in the crypto space are under a regulatory microscope. He added:

Financial companies operating in the cryptocurrency marketplace are on notice. If you sell securities in New Jersey, you need to comply with New Jersey’s investor protection laws. Companies dealing in cryptocurrencies are not immune from oversight.

The main reason behind the regulatory scrutiny is the fact that crypto lending programs, while resembling bank savings accounts, are not insured by FDIC, which leaves customers more vulnerable. Nevertheless, it is worth noting that interest rates offered by banks are near zero while some crypto lending products offer double-digit returns — which describes why they are so popular.

SEC Chairman Gary Gensler has recently told The Block regarding the crypto lending programs:

That platform might be saying, as many of them do, we’ll give you a four percent or seven percent return if you stake your coins with us or you actually transfer ownership and we the platform will stake your tokens. That takes on all the indications of what Congress is trying to protect under the securities laws.

More recently, following the path of Texas and New Jersey, the securities regulator for Alabama issued a show-cause order to Celsius. The order requires Celsius to justify, explain, and prove that its crypto lending product is not a security.

As per the order, “[t]he investment programs, identified as Celsius Earn Reward, constitute the solicitation of an investment of money; from which an investment return is expected; with such investment return based on the managerial efforts of [Celsius]. The solicited investments, identified as the Celsius “Earn Rewards program”, are “investment contrast” and are securities under the Securities Act.”