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Could Crypto Lending Become Illegal

Why crypto is restricted and banned in some areas and why it can become both illegal and legal in the future.

The sentiments surrounding cryptocurrencies and digital assets have been divisive thus far. While there are restrictions and bans in some countries, there is also positive news about its adoption in other countries.

Crypto lending is a service that falls under the category of digital assets. This means that the way people feel about crypto assets in general also applies to crypto lending and other similar services.

Suppose you are open to lending your crypto to earn interest. In that case, you are most likely concerned about the legal implications of your decision now and in the future.

This article will help you figure out what to do by explaining why some places limit or ban crypto and why it could become both illegal and legal in the future.

Reasons for Crypto Restrictions and Ban by Nations

Countries have been putting limits on crypto and services related to it, like crypto lending, for a number of reasons. Some governments don't like it because it's hard to keep track of and has connections to illegal activities.

In the United States, crypto is under strict regulatory supervision. The SEC put an end to the boom of initial coin offerings (ICOs) because there seemed to be a lack of control that did more harm than good to inexperienced crypto investors.

The SEC also believes that cryptocurrencies are actually securities that must be subject to strict regulations. The Treasury Department is worried about both the stability of the economy and crimes like money laundering.

Reasons Why Crypto Lending Might Become Illegal

1. Implicit bans and restrictions placed on digital assets

In some jurisdictions, the use of crypto is neither banned outright nor given full permission. In these areas, certain uses are prohibited while others are permitted. Prohibiting banks and other financial institutions from dealing in cryptocurrencies, offering services to individuals/businesses dealing in cryptocurrencies, or banning cryptocurrency exchanges are examples of implicit bans.

According to a recent report, there are 21 countries that have placed implicit bans on the usage of cryptocurrency. There is a chance that the government will move toward a complete ban in these areas. If this happens, crypto lending in these areas will undoubtedly become illegal.

2. Federal Security Laws and Regulations

Even in places where cryptocurrencies are recognized and their full use is allowed, there is a regulatory framework around them. This is especially true when it comes to tax laws and laws against money laundering and financing terrorism (AML/CFT laws).

In the United States, crypto is dealing with more serious regulatory issues, as multiple federal and state agencies seek to exercise some form of financial oversight over it.

3. Actions of the Securities and Exchange Commission

Securities regulators like the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) are going after the crypto industry.

On August 6, 2021, the SEC charged and issued a cease-and-desist order against Blockchain Credit Partners, a decentralized finance lending platform, for unregistered sales of more than $30 million of securities using smart contracts, and for misleading investors concerning the operations and profitability of their business.

When a crypto lending platform gets around the law by giving users unregistered securities, the Securities and Exchange Commission bans the platform. This makes crypto lending on that platform illegal.

4. Actions of the Internal Revenue Service

The Internal Revenue Service (IRS) has been keeping a close eye on what people, organizations, and institutions do with cryptocurrencies.

In 2016, they asked Coinbase, a cryptocurrency exchange, to tell them which users had bought, sold, sent, or received at least $20,000 worth of cryptocurrency in the previous year.

With this information, the IRS sent 10,000 compliance letters to taxpayers, telling them that they had not reported their cryptocurrency transactions correctly.

People have been able to avoid paying capital gains tax on their crypto earnings by taking out a crypto loan. This is because it is not a taxable event to get cash in exchange for putting up crypto as collateral. Spending the loan is also not a taxable event.

Since the IRS keeps an eye on every part of crypto, including mining, NFTs, and even decentralized finance, they might turn their attention to crypto lending products and services and look for ways to apply tax laws to people who use them to avoid paying capital gains taxes on their digital assets.

Reasons Why Crypto Lending Might Not Become Illegal

1. New and updated regulations

When a region updates its laws and regulations to allow for the use of cryptocurrencies, it indicates that it is open to the use case and may fully adopt it in the future. Crypto lending services will thrive in these regions.

Cryptocurrency and other services are welcome in Europe because the people there are friendly. Also, regulations have made it clear that crypto is a legitimate form of money and an asset class.

The 5th Anti-Money Laundering Directive (5 AMLD) regulatory framework, which will be put in place in Europe in 2020, recognizes crypto service providers as entities that need to follow the same anti-money laundering and counter-terrorist financing rules as traditional financial institutions.

2. Settlements

The fact that the SEC is willing to make deals with crypto companies that break the law shows that crypto might not become completely illegal.

In the US, a crypto lending platform called BlockFi, which is now bankrupt, reached a settlement with the SEC because it sold unregistered securities to its users, which was against the Investment Company Act of 1940. After paying the fines, the SEC let BlockFi, which is now bankrupt, make a new lending product for people in the United States.

This move showed that the federal government and securities regulators are in favor of crypto lending products and cryptocurrencies in general being legalized.

3. Cryptocurrency adoption

Cryptocurrency is currently being adopted and accepted in various locations around the globe. Some countries are also trying to get it accepted as money in their area. As the world of crypto grows, more countries will be ready to add digital money to their financial systems. Thus, in that atmosphere, cryptocurrency trading and crypto lending will thrive.

Summary

In order to keep control of this quickly growing area, regulators are cracking down on crypto and the services that use it. The SEC and IRS are leading the charge. Their policies also offer some form of investor protection.

In areas where crypto is restricted or prohibited entirely, the federal security laws, actions of regulators, and nature of the government's stance towards digital assets will have a bearing on whether crypto lending will become legal in such areas.