BlockFi Lending LLC (BlockFi) is a centralized crypto lending platform whereby assets are held on the BlockFi platform as opposed to any DeFi (decentralized finance) protocol. Crypto lending platforms operate via the protocol that users receive loans in FIAT currency using their cryptocurrency as collateral, paying the lender crypto dividends. BlockFi interest accounts (BIA’s) have been thoroughly in demand attracting over 10.4 million USD from some 570 thousand investors.
However, on February 14th 2022, BlockFi settled for a sum of 100 million USD with the Securities and Exchange Commission (SEC) following a violation of the Investment Company Act of 1940; the SEC argued that interest-bearing BlockFi Interest Accounts (BIA’s) should have been registered as securities. This is the first enforcement action taken against any crypto platforms by the SEC and marks the end of any legal uncertainty surrounding crypto lending products in the USA. As a result, BlockFi will be banned from issuing such accounts until it complies with current regulations, although BlockFi admits no wrongdoing as part of the settlement deal.
Before February 14th, both the United Kingdom (UK) and the United States of America (USA) had seen an insufficient level of consumer protection regarding digital assets: to a certain extent, the BlockFi case marks a lagging indicator of how far the UK is behind the USA. Lending to the completely unregulated, volatile nature of these assets coupled with the garish, often inaccurate advertising, this is a large source of concern.
Currently, in the UK, crypto assets are not subject to safeguards that would apply to other traditional financial services. Earlier this year, on January 18th, HM Treasury’s Consultation published a consultation paper confirming their plans to expand the UK’s financial promotion regime to cover crypto assets.
As financial promotion focuses on engagement in investment activity with a “controlled investment”, the consultation report detailed ideas to move crypto assets under this umbrella term. This would allow widespread regulation and consumer protection – omitting NFTs from this umbrella term as they bear more resemblance to non-financial products. As a result, it is worth considering whether this is a holistic solution and how much time a complete, robust solution may require. It should also be noted that this report simply outlines an idea, and there are yet to be any developments at this point.
Digital Asset banking platform BVNK based in the UK offers Yield accounts whereby returns are accrued by offering collateralized loans like BlockFi. This currently lies outside of the Financial Conduct
Authority’s (FCA) boundary hence such practices go undeterred. BVNK Yield accounts have been popular so far with a quarter of the firm’s 100 clients signing up at the tantalizing offer of returns averaging 4-8%. Lending to the over-collateralized nature of these loans all appears steady however these deposits are not insured, as a ‘regular’ FTC approved loan would be, and like any other crypto product indirectly exposes clients to great volatility.
In terms of predicting how the FCA will regulate crypto lending, it is useful to draw parallels with the High-Cost Short Term (HCST) sector where large scale consumer lending also takes place. For example, affordability checks were put in place to mitigate risk with loan repayments in HCST. Whether this is something crypto lending firms would consider is quite unlikely. The data which would have to be collected (expenditure, transaction history, etc.) certainly goes against the principles underlying cryptocurrency in the first place.
Furthermore, when such regulations were put in place in HCST retrospective remediation was applied. This meant that lending platforms were liable for any losses suffered by consumers before the date the legislation was applied. Were this to happen with BVNK, the operation to put right older transactions would be quite infeasible. This also begs the question of whether we can expect even stricter criteria further into the future and how the current market conditions, more so the lack of regulation, will have affected this.
The USA has a head start regulating crypto lending products but only time will tell how much relevance this may bear. The key principles of cryptocurrency completely contradict these practices, to begin with. It is worth questioning the aims of the SEC and FCA – particularly the threat that increasing restrictions pose against the makeup of crypto entirely. If this was to happen, we may see some pushback from institutional crypto investors in the future.
Written by: Owen Dauber
Sector Head: Sophia Li