The lending business is simple and is the core of the existing banking industry. But, when it comes to interests in US dollar deposits, they are only offering around 0.05 percent. Crypto lenders changed this game by offering substantially high interests against crypto deposits, sometimes in the north of 10 percent.
These crypto lenders act as a middle man (just like banks): they take digital assets as deposits from borrowers and then usually lend them to institutions. Because of the gap in the supply and demand of digital assets, institutional clients are willing to pay very high interests. Crypto lending platforms take a cut of this interest and give the rest to the borrowers.
Crypto lending platforms, like BlockFi, Celsius, and Nexo, have become very popular over the past few years. Demand for their services soared among retail digital asset holders.
But unlike the banking industry that is heavily regulated, these crypto lending Crypto Lending The process of lending cryptocurrency assets with an accrued interest rate and due date is known as crypto lending. The process of crypto lending often occurs through cryptocurrency exchanges or online lending platforms to connect borrowers to lenders. Lenders of crypto lending are comprised of institutional lenders, like hedge funds and asset managers, individual participants, or entities seeking to accrue interest. On the opposite end of the spectrum, borrowers of crypto lending include market makers, proprietary traders, investment managers, hedge funds, traders.These entities or individuals look to short the market, arbitrage-based traders, or entities who need to fulfill an obligation with another party. Different Types of Crypto LendingWhile the process of crypto lending is simply, there are four types of crypto lending practices that traders should familiarize themselves with.Companies, individuals, or entities who possess an excess of cryptocurrencies can earn additional cryptocurrencies through crypto lending. Crypto-to-crypto lending materializes in the form of a smart contract, where crypto lenders can earn interest for a specific period. Common cryptocurrencies that are lent include Bitcoin, Ethereum, and Altcoins. Two examples of crypto-to-crypto lending include Nuo and Coincheck. Moreover, margin lending is a new type of crypto lending, which enables lenders to fund varying cryptocurrencies to borrowers as opposed to a single crypto asset. Typically, lenders of margin lending fix their interest rate and contract duration while occurring over a centralized platform such as Nuo and Bitfinex. While less common, crypto-to-fiat lending occurs when individuals, businesses, or entities require cash. Cryptocurrencies are used as collateral while the lender receives a fiat return which generally is credited to a linked bank account. Finally, crypto-credit lending occurs when entities need capital. Opposed to peer-to-peer (P2P) lending, crypto-credit lending places less emphasis on credit history although this comes with a sacrifice of regulation. The process of lending cryptocurrency assets with an accrued interest rate and due date is known as crypto lending. The process of crypto lending often occurs through cryptocurrency exchanges or online lending platforms to connect borrowers to lenders. Lenders of crypto lending are comprised of institutional lenders, like hedge funds and asset managers, individual participants, or entities seeking to accrue interest. On the opposite end of the spectrum, borrowers of crypto lending include market makers, proprietary traders, investment managers, hedge funds, traders.These entities or individuals look to short the market, arbitrage-based traders, or entities who need to fulfill an obligation with another party. Different Types of Crypto LendingWhile the process of crypto lending is simply, there are four types of crypto lending practices that traders should familiarize themselves with.Companies, individuals, or entities who possess an excess of cryptocurrencies can earn additional cryptocurrencies through crypto lending. Crypto-to-crypto lending materializes in the form of a smart contract, where crypto lenders can earn interest for a specific period. Common cryptocurrencies that are lent include Bitcoin, Ethereum, and Altcoins. Two examples of crypto-to-crypto lending include Nuo and Coincheck. Moreover, margin lending is a new type of crypto lending, which enables lenders to fund varying cryptocurrencies to borrowers as opposed to a single crypto asset. Typically, lenders of margin lending fix their interest rate and contract duration while occurring over a centralized platform such as Nuo and Bitfinex. While less common, crypto-to-fiat lending occurs when individuals, businesses, or entities require cash. Cryptocurrencies are used as collateral while the lender receives a fiat return which generally is credited to a linked bank account. Finally, crypto-credit lending occurs when entities need capital. Opposed to peer-to-peer (P2P) lending, crypto-credit lending places less emphasis on credit history although this comes with a sacrifice of regulation. Read this Term platforms are operating in an unregulated market without any regulatory oversight.
“Generally, in order for an institution to lend or borrow the US dollar, it requires very strict regulation and licenses. These regulations were designed to protect the general public from problems such as monetary losses and money laundering Money Laundering Money laundering is a blanket term to describe the process by which criminals disguise the original ownership and proceeds of criminal conduct by making such proceeds appear to be derived from a legitimate source.Money laundering is an issue that traverses countless industries and sectors, which includes the financial services space. Though criminal money may be successfully laundered without the assistance of the financial sector, billions of dollars’ worth of criminally derived money are laundered through financial institutions each year.This is not entirely surprising given the structure of the financial services industry and the nature of products and services offered by its participants.An ecosystem that involves the management, control, and processing of finances is inherently vulnerable to abuse by money launderers.Money Laundering ExplainedThe act of laundering is committed in circumstances in which an individual or entity is engaged in an arrangement that involves the proceeds of crime. These arrangements include a wide range of business relationships, i.e. banking, fiduciary and investment management.However, the degree of knowledge or suspicion will depend upon the specific offense but will usually be present where the person providing the arrangement, service or product knows, suspects or has reasonable grounds to suspect that the property involved in the arrangement represents the proceeds of crime. In some cases, the offence may also be committed where a person knows or suspects that the person with whom he or she is dealing is engaged in or has benefited from criminal conduct.One of the primary criticisms against cryptocurrencies has been their propensity for money laundering. Their anonymous nature and unregulated network structure make them ideally suited for money launders. Money laundering is a blanket term to describe the process by which criminals disguise the original ownership and proceeds of criminal conduct by making such proceeds appear to be derived from a legitimate source.Money laundering is an issue that traverses countless industries and sectors, which includes the financial services space. Though criminal money may be successfully laundered without the assistance of the financial sector, billions of dollars’ worth of criminally derived money are laundered through financial institutions each year.This is not entirely surprising given the structure of the financial services industry and the nature of products and services offered by its participants.An ecosystem that involves the management, control, and processing of finances is inherently vulnerable to abuse by money launderers.Money Laundering ExplainedThe act of laundering is committed in circumstances in which an individual or entity is engaged in an arrangement that involves the proceeds of crime. These arrangements include a wide range of business relationships, i.e. banking, fiduciary and investment management.However, the degree of knowledge or suspicion will depend upon the specific offense but will usually be present where the person providing the arrangement, service or product knows, suspects or has reasonable grounds to suspect that the property involved in the arrangement represents the proceeds of crime. In some cases, the offence may also be committed where a person knows or suspects that the person with whom he or she is dealing is engaged in or has benefited from criminal conduct.One of the primary criticisms against cryptocurrencies has been their propensity for money laundering. Their anonymous nature and unregulated network structure make them ideally suited for money launders. Read this Term to name a few. With crypto, these types of regulations have yet to exist,” said Giorgi Khazaradze, CEO at Aurox.
A Landmark Settlement
Most of the popular lending platforms are centralized and are not required to report their activities to a government body. Being private entities, all of their business is being done behind closed doors.
These companies were already under the radar of the US regulators, both federal and state. It became prominent after BlockFi confirmed a $100 million settlement with the Securities and Exchange Commission (SEC) and 32 state regulators. The crypto company was also ordered to open any new customer accounts in the US until it gains SEC’s approval.
Interestingly, BlockFi’s Founder and CEO, Zac Prince said that the massive settlement was “a win not only for BlockFi but for the broader cryptocurrency industry.” But how?
Well, it kicked off the possibility of introducing regulations in the crypto lending space. The SEC earlier threatened Coinbase with legal actions that forced the crypto exchange to shelve its plans to launch an interest-bearing account, but the regulatory approach was different with BlockFi.
The crypto lending firm also received a 60 day period to meet the requirements of the SEC’s Investment Company Act. It also has to register future lending products with the agency.
Speaking on the regulatory stance towards crypto lenders, TrustToken’s Compliance Officer, Teresa Anaya, said: “I think it does need to be regulated with thoughtful rules and clear guidelines, and regulators need to maintain a sincere and fair dialogue with the industry to enable some sort of sandbox ability to build within guardrails. Too many protocols remain reluctant to work with official bodies for fear of aggressive shutdowns, even though they are themselves making an honest effort to adhere to regulations.”
Future of Crypto Lending
The settlement of BlockFi with the SEC has opened the gates of regulation. But, it is also prompting other companies to rethink the terms of their interest-bearing accounts. After BockFi’s settlement, its competitor Nexo also stopped paying interest on new crypto deposits.
So can companies continue to offer interest-bearing crypto accounts in the US? “It can, and it still does,” Khazaradze said. “Centralized services will probably have to figure out how to properly register in the United States before reopening their services, but decentralized services such as AAVE and Compound are still offering interest-bearing solutions.”
What we can expect in the near future is more such settlements or companies aligning their products with existing regulations. As long as they follow already established securities and lending regulations, any crypto company can offer such products.
But these companies could face a slow regulatory approach that might cripple their business.
Business Is Good Outside the US
While the US always leads the global financial markets, the regulators in the county fall behind when it comes to crypto rules.
“The US was not moving fast enough, and other countries took the lead by creating sandboxes (Singapore), while yet others developed their own regulatory regimes for crypto (Switzerland, UK). It’s going to continue to be very confusing for those involved in digital assets, especially legal counsel and compliance teams, as regulations will be different in all jurisdictions,” said Anaya.
“Digital assets are immediately global, and a global standards body should create a risk assessment regime amenable for all countries to follow. As new innovations come to market, we can conduct risk assessments and develop controls so innovation can move forward.”
The lending business is simple and is the core of the existing banking industry. But, when it comes to interests in US dollar deposits, they are only offering around 0.05 percent. Crypto lenders changed this game by offering substantially high interests against crypto deposits, sometimes in the north of 10 percent.
These crypto lenders act as a middle man (just like banks): they take digital assets as deposits from borrowers and then usually lend them to institutions. Because of the gap in the supply and demand of digital assets, institutional clients are willing to pay very high interests. Crypto lending platforms take a cut of this interest and give the rest to the borrowers.
Crypto lending platforms, like BlockFi, Celsius, and Nexo, have become very popular over the past few years. Demand for their services soared among retail digital asset holders.
But unlike the banking industry that is heavily regulated, these crypto lending Crypto Lending The process of lending cryptocurrency assets with an accrued interest rate and due date is known as crypto lending. The process of crypto lending often occurs through cryptocurrency exchanges or online lending platforms to connect borrowers to lenders. Lenders of crypto lending are comprised of institutional lenders, like hedge funds and asset managers, individual participants, or entities seeking to accrue interest. On the opposite end of the spectrum, borrowers of crypto lending include market makers, proprietary traders, investment managers, hedge funds, traders.These entities or individuals look to short the market, arbitrage-based traders, or entities who need to fulfill an obligation with another party. Different Types of Crypto LendingWhile the process of crypto lending is simply, there are four types of crypto lending practices that traders should familiarize themselves with.Companies, individuals, or entities who possess an excess of cryptocurrencies can earn additional cryptocurrencies through crypto lending. Crypto-to-crypto lending materializes in the form of a smart contract, where crypto lenders can earn interest for a specific period. Common cryptocurrencies that are lent include Bitcoin, Ethereum, and Altcoins. Two examples of crypto-to-crypto lending include Nuo and Coincheck. Moreover, margin lending is a new type of crypto lending, which enables lenders to fund varying cryptocurrencies to borrowers as opposed to a single crypto asset. Typically, lenders of margin lending fix their interest rate and contract duration while occurring over a centralized platform such as Nuo and Bitfinex. While less common, crypto-to-fiat lending occurs when individuals, businesses, or entities require cash. Cryptocurrencies are used as collateral while the lender receives a fiat return which generally is credited to a linked bank account. Finally, crypto-credit lending occurs when entities need capital. Opposed to peer-to-peer (P2P) lending, crypto-credit lending places less emphasis on credit history although this comes with a sacrifice of regulation. The process of lending cryptocurrency assets with an accrued interest rate and due date is known as crypto lending. The process of crypto lending often occurs through cryptocurrency exchanges or online lending platforms to connect borrowers to lenders. Lenders of crypto lending are comprised of institutional lenders, like hedge funds and asset managers, individual participants, or entities seeking to accrue interest. On the opposite end of the spectrum, borrowers of crypto lending include market makers, proprietary traders, investment managers, hedge funds, traders.These entities or individuals look to short the market, arbitrage-based traders, or entities who need to fulfill an obligation with another party. Different Types of Crypto LendingWhile the process of crypto lending is simply, there are four types of crypto lending practices that traders should familiarize themselves with.Companies, individuals, or entities who possess an excess of cryptocurrencies can earn additional cryptocurrencies through crypto lending. Crypto-to-crypto lending materializes in the form of a smart contract, where crypto lenders can earn interest for a specific period. Common cryptocurrencies that are lent include Bitcoin, Ethereum, and Altcoins. Two examples of crypto-to-crypto lending include Nuo and Coincheck. Moreover, margin lending is a new type of crypto lending, which enables lenders to fund varying cryptocurrencies to borrowers as opposed to a single crypto asset. Typically, lenders of margin lending fix their interest rate and contract duration while occurring over a centralized platform such as Nuo and Bitfinex. While less common, crypto-to-fiat lending occurs when individuals, businesses, or entities require cash. Cryptocurrencies are used as collateral while the lender receives a fiat return which generally is credited to a linked bank account. Finally, crypto-credit lending occurs when entities need capital. Opposed to peer-to-peer (P2P) lending, crypto-credit lending places less emphasis on credit history although this comes with a sacrifice of regulation. Read this Term platforms are operating in an unregulated market without any regulatory oversight.
“Generally, in order for an institution to lend or borrow the US dollar, it requires very strict regulation and licenses. These regulations were designed to protect the general public from problems such as monetary losses and money laundering Money Laundering Money laundering is a blanket term to describe the process by which criminals disguise the original ownership and proceeds of criminal conduct by making such proceeds appear to be derived from a legitimate source.Money laundering is an issue that traverses countless industries and sectors, which includes the financial services space. Though criminal money may be successfully laundered without the assistance of the financial sector, billions of dollars’ worth of criminally derived money are laundered through financial institutions each year.This is not entirely surprising given the structure of the financial services industry and the nature of products and services offered by its participants.An ecosystem that involves the management, control, and processing of finances is inherently vulnerable to abuse by money launderers.Money Laundering ExplainedThe act of laundering is committed in circumstances in which an individual or entity is engaged in an arrangement that involves the proceeds of crime. These arrangements include a wide range of business relationships, i.e. banking, fiduciary and investment management.However, the degree of knowledge or suspicion will depend upon the specific offense but will usually be present where the person providing the arrangement, service or product knows, suspects or has reasonable grounds to suspect that the property involved in the arrangement represents the proceeds of crime. In some cases, the offence may also be committed where a person knows or suspects that the person with whom he or she is dealing is engaged in or has benefited from criminal conduct.One of the primary criticisms against cryptocurrencies has been their propensity for money laundering. Their anonymous nature and unregulated network structure make them ideally suited for money launders. Money laundering is a blanket term to describe the process by which criminals disguise the original ownership and proceeds of criminal conduct by making such proceeds appear to be derived from a legitimate source.Money laundering is an issue that traverses countless industries and sectors, which includes the financial services space. Though criminal money may be successfully laundered without the assistance of the financial sector, billions of dollars’ worth of criminally derived money are laundered through financial institutions each year.This is not entirely surprising given the structure of the financial services industry and the nature of products and services offered by its participants.An ecosystem that involves the management, control, and processing of finances is inherently vulnerable to abuse by money launderers.Money Laundering ExplainedThe act of laundering is committed in circumstances in which an individual or entity is engaged in an arrangement that involves the proceeds of crime. These arrangements include a wide range of business relationships, i.e. banking, fiduciary and investment management.However, the degree of knowledge or suspicion will depend upon the specific offense but will usually be present where the person providing the arrangement, service or product knows, suspects or has reasonable grounds to suspect that the property involved in the arrangement represents the proceeds of crime. In some cases, the offence may also be committed where a person knows or suspects that the person with whom he or she is dealing is engaged in or has benefited from criminal conduct.One of the primary criticisms against cryptocurrencies has been their propensity for money laundering. Their anonymous nature and unregulated network structure make them ideally suited for money launders. Read this Term to name a few. With crypto, these types of regulations have yet to exist,” said Giorgi Khazaradze, CEO at Aurox.
A Landmark Settlement
Most of the popular lending platforms are centralized and are not required to report their activities to a government body. Being private entities, all of their business is being done behind closed doors.
These companies were already under the radar of the US regulators, both federal and state. It became prominent after BlockFi confirmed a $100 million settlement with the Securities and Exchange Commission (SEC) and 32 state regulators. The crypto company was also ordered to open any new customer accounts in the US until it gains SEC’s approval.
Interestingly, BlockFi’s Founder and CEO, Zac Prince said that the massive settlement was “a win not only for BlockFi but for the broader cryptocurrency industry.” But how?
Well, it kicked off the possibility of introducing regulations in the crypto lending space. The SEC earlier threatened Coinbase with legal actions that forced the crypto exchange to shelve its plans to launch an interest-bearing account, but the regulatory approach was different with BlockFi.
The crypto lending firm also received a 60 day period to meet the requirements of the SEC’s Investment Company Act. It also has to register future lending products with the agency.
Speaking on the regulatory stance towards crypto lenders, TrustToken’s Compliance Officer, Teresa Anaya, said: “I think it does need to be regulated with thoughtful rules and clear guidelines, and regulators need to maintain a sincere and fair dialogue with the industry to enable some sort of sandbox ability to build within guardrails. Too many protocols remain reluctant to work with official bodies for fear of aggressive shutdowns, even though they are themselves making an honest effort to adhere to regulations.”
Future of Crypto Lending
The settlement of BlockFi with the SEC has opened the gates of regulation. But, it is also prompting other companies to rethink the terms of their interest-bearing accounts. After BockFi’s settlement, its competitor Nexo also stopped paying interest on new crypto deposits.
So can companies continue to offer interest-bearing crypto accounts in the US? “It can, and it still does,” Khazaradze said. “Centralized services will probably have to figure out how to properly register in the United States before reopening their services, but decentralized services such as AAVE and Compound are still offering interest-bearing solutions.”
What we can expect in the near future is more such settlements or companies aligning their products with existing regulations. As long as they follow already established securities and lending regulations, any crypto company can offer such products.
But these companies could face a slow regulatory approach that might cripple their business.
Business Is Good Outside the US
While the US always leads the global financial markets, the regulators in the county fall behind when it comes to crypto rules.
“The US was not moving fast enough, and other countries took the lead by creating sandboxes (Singapore), while yet others developed their own regulatory regimes for crypto (Switzerland, UK). It’s going to continue to be very confusing for those involved in digital assets, especially legal counsel and compliance teams, as regulations will be different in all jurisdictions,” said Anaya.
“Digital assets are immediately global, and a global standards body should create a risk assessment regime amenable for all countries to follow. As new innovations come to market, we can conduct risk assessments and develop controls so innovation can move forward.”