Developments continue at a frenetic pace in the crypto industry. Issues barely on the radar screen 18 months ago have come front and center in today’s headlines. Areas with relatively small market capitalizations a year ago have ballooned many multiples during the past year. This advisory overviews three key areas — crypto lending, decentralized finance (DeFi) and stablecoins — and summarizes what key regulators have been saying about and doing in them.
I. Interest Bearing Accounts (or Crypto Lending)
- A number of crypto platforms now offer interest-bearing opportunities permitting their customers to earn interest on cryptoassets that they hold with, or lend to, such platforms. On the back end, the platforms generally use those deposited or lent assets to fund digital asset loans to traders or other market players.
- Many of these opportunities tout interest-rate returns far exceeding what traditional financial institutions currently offer.
- These crypto lending accounts or relationships are not traditional bank accounts or relationships and are not insured by the Federal Deposit Insurance Corporation (FDIC), and the platforms that offer these products are not members of the Securities Investor Protection Corporation (SIPC). Thus, these “deposit accounts” or lent assets are not entitled to the same regulatory protections that apply to conventional bank or brokerage accounts.
Canaries in the Coal Mine? Regulatory Scrutiny
- Purported interest-bearing accounts offered by one major market player have generated significant regulatory scrutiny in recent months. Securities regulators in five different states have alleged that, or at least questioned whether, these “accounts” are actually unregistered securities offerings to residents of those states and, in some cases, have already issued cease-and-desist orders to the offering firm.1
- Separately, Coinbase issued a public statement on September 7 disclosing that it had received a Wells notice from the Securities and Exchange Commission (SEC) with respect to its proposed Coinbase Lend program (Lend program), which would have allowed users to earn interest on select assets held with Coinbase.2 In essence, the Wells notice was a warning to Coinbase that if it were to launch the program as proposed, the SEC would take formal action against it. The SEC reportedly has informed Coinbase that it views Lend program as a security under the Howey and Reves tests.3
- Coinbase maintains that the Lend program does not constitute an offering of securities because “[c]ustomers won’t be ‘investing’ in the program, but rather lending the [stablecoins] they hold on Coinbase’s platform in connection with their existing relationship. And although Lend customers will earn interest from their participation in the program, [Coinbase has] an obligation to pay this interest regardless of Coinbase’s broader business activities. What’s more, participating customers’ principal is…
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