Cryptocurrency lending regulations are coming. The BlockFi's SEC deal is paving the way.

For years, the crypto industry and the SEC have been at odds over whether cryptocurrency products that pay interest like securities are securities. That changed on Monday when the SEC and BlockFi announced a deal to take crypto lending out of the water and make it  a regulated product.  
 

BlockFi agreed in a settlement with the SEC to pay a $100 million fine for selling its crypto lending product without registering it as collateral. And he also said he plans to file with the SEC to register his BlockFi product Yield  as a security. 
 

The SEC  made its stance clear on crypto lending  in September when it forced Coinbase to abandon its Planned Lending product. This comes a month after SEC Chairman Gary Gensler gave a speech at the Aspen Privacy Forum in which he said such products are securities and should be regulated as such.  While the SEC has other crypto issues on Gensler's to-do list, like regulating crypto exchanges, crypto lending seems to be at the top right now. That's because that's a problem for the SEC, according to some legal experts,  where it doesn't have to wait for  action from Congress and can instead rely on existing law, a legal principle established by law. called the Howey trial and the 2004 Supreme Court decision. Case. BlockFi is one of the biggest players in the crypto lending space and has been offering this service for a while, so it makes perfect sense for the SEC to go after it.

There are others such as Celsius and Nexo that offer similar services. Others convert fiat currencies that customers deposit into stablecoins that offer attractive returns in a variety of ways. As BlockFi has agreed to address the situation, other companies offering cryptocurrency loans are likely to make their products compliant or face inquiries from the SEC. There are only a handful of regulated crypto products like Circle Yield and Compound Labs Treasure. However, unlike BlockFi, it is an institutional product that is only open to accredited investors. The Securities and Exchange Commission (SEC) approved the BOX exchange using blockchain technology in January to approve other crypto products. Last year, he approved two Bitcoin futures ETFs, the Proshares Bitcoin Strategy ETF and the Valkyrie Bitcoin Strategy ETF, but not an ETF that invests directly in cryptocurrencies.

The work of the SEC is not yet finished. One question he will face when curbing cryptocurrency lending is how to regulate non-corporate ones. A lot of crypto lending is happening on DeFi Web3 (Decentralized Finance). This means a departure from the usual corporate structures the SEC is accustomed to dealing with. Many crypto lending services operate as decentralized protocols and no single company controls them. The people you work with are often abroad and may not be US citizens. Although some protocols were originally launched by companies, protocol management is often left to token holders. As a result, it's not clear how these products could be shut down, even if the SEC wanted them to. Investors will go where the returns are high. Despite signals from the Fed to raise rates, interest rates on traditional savings accounts are still relatively low.

There is already over $200 billion in total value locked or deposited on DeFi services. More and more investors, including large institutions, are betting on DeFi. One product, Aave Arc, allows institutional investors to invest in DeFi with whitelisted partners. 
 

Regulators have not mentioned DeFi products directly. However, the SEC is said to have been scrutinizing some of the companies that helped launch the DeFi protocol, such as Uniswap Labs, the company behind the decentralized cryptocurrency exchange Uniswap.  
 

The downside of the emerging regulatory mechanism for crypto lending is that it can put even the most discerning investors looking for the highest returns from decentralized services that are truly  out of reach. of managers. But the upside is that the scrutiny of the SEC  and the resulting seal of approval could bring more financial consumers looking for reliable products into the mix.