Cryptocurrency companies said they are concerned about US legislation governing products that allow users to earn interest on their holdings rather than trading them, months after a federal regulator and state governments fined a cryptocurrency company $100 million.
BlockFi, a crypto company based in New Jersey, agreed to pay $100 million in a landmark settlement with the US Securities and Exchange Commission and state regulators in February, after the SEC and state authorities determined that its interest-bearing product qualifies as a security and should have been registered.
Many digital asset companies who provide such items, however, indicated this month that the laws are still unclear to them and that they are unsure when they should register such offers, which are becoming increasingly popular and that many companies established within the last year.
Most companies have attempted to structure interest-bearing products in such a way as to avoid having to register them with the Securities and Exchange Commission (SEC), a procedure that takes time and requires continuing disclosure and reporting duties. As the government's monitoring of the crypto business grows, this attempt may set them up for a battle with the agency.
BlockFi intends to launch an alternate yield product, which it claims to be the first to register. The transaction, according to the corporation and the SEC, should serve as a model for other businesses.
"Our resolution with the SEC is a key step to achieving regulatory clarity for not only BlockFi but the crypto ecosystem as a whole, which is necessary for long-term mass adoption of crypto financial services," a BlockFi spokesperson mentioned in a report.
Instead of using enforcement actions to set boundaries, industry insiders believe the SEC should explicitly define what defines a security.
According to Nicholas Losurdo, a partner at Goodwin and previous counsel to recently departed SEC Commissioner Elad Roisman, SEC registration of crypto goods is "not always a path that others can follow for many different circumstances." "A better way for the SEC to communicate what it expects is for it to just say what it expects."
Securities, unlike other assets like commodities, are heavily regulated and need extensive disclosures to alert investors about potential dangers. Despite the fact that the Securities Act of 1933 defined the term "security," many experts rely on two U.S. Supreme Court precedents to evaluate whether an investment product is a security.
Although the SEC has not responded to a request for comment, SEC Chair Gary Gensler has stated that most cryptocurencies are securities in certain instances. Many in the sector disagree, citing different legal interpretations.
The New York State Department of Financial Services has approved an interest-bearing crypto product offered by Gemini, a crypto exchange. According to Noah Perlman, Gemini's chief operating officer, the clearance separates it from BlockFi's offering and indicates that the settlement had no impact on them.
“You've got an industry that wants to work with regulators, and yet you've got regulators who are not in the habit of giving advisory opinions," he said
State regulators who ordered BlockFi to stop selling its product also ordered crypto firm Celsius Network to stop selling its Celsius Earn product in September, calling it an unregistered security. Celsius CEO Alex Mashinsky did not indicate whether the device would be registered, but he told Reuters earlier this month that he was not worried about the SEC suing since Celsius is "far more cautious than BlockFi."
He also stated that BlockFi's device "didn't harm anyone."
Celsius has ceased accepting new transfers to its Earn accounts from U.S. retail investors since that interview. Further attempts for comment were not returned by the company.
According to Richard Levin, chair of Nelson Mullins' fintech and regulation group, several crypto businesses are considering limiting their offers to be clearly free from SEC registration restrictions.
Institutional investors are the only ones who can buy Circle Internet Financial's yield products.
"If a yield product pays dividends to customers, it will almost certainly be recognized as a security. As we were putting together Circle Yield, we agreed on that "Circle's chief strategy officer, Dante Disparte, stated.
Coinbase, the largest cryptocurrency exchange in the United States, canceled plans to offer a crypto-lending product after the Securities and Exchange Commission threatened to sue in September.
In light of the SEC's strong attitude, some crypto businesses have stated that they are being careful. According to Marco Santori, the company's chief legal officer, Kraken would want to provide an interest-bearing product but is concerned since the SEC has not offered guidelines.
Bitstamp, a crypto exchange with a virtual currency license in New York, wants to provide a yield product to institutional investors in the United States, but it thinks it'll require further licenses and clearance from New York regulators.
"Some crypto players in the United States have gotten themselves into a lot of trouble because of how they've handled lending and credit-type offerings," Bobby Zagotta, CEO of Bitstamp USA, said. "We don't want to go there, so we'll be extra cautious."