Could Crypto Lending Become Illegal

The sentiments surrounding cryptocurrencies and digital assets have been divisive thus far. While you hear about its restriction and ban in some countries, you also hear positive news about its adoption in some other nations.

Crypto lending is a service under the umbrella of digital assets; therefore, whatever sentiments surrounding crypto assets as a whole also have a positive correlation with crypto lending and other such services.

Suppose you are open to lending your crypto to get Interest and rewards or taking out a crypto loan using your digital assets as collateral. 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 evaluate such decisions by highlighting why crypto is restricted and banned in some areas and why it can become both illegal and legal in the future.

Reasons for Crypto Restrictions and Ban by Nations

There are various reasons why countries have been placing restrictions on crypto and its related services, such as crypto lending. The anonymous nature, lack of control, and illicit ties have made some governments not support its use.

In the United States, Crypto is under strict regulatory supervision. The SEC put an end to the boom of Initial Coin Offerings (ICO) because there seems to be a lack of control that does 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 concerned with financial stability as well as money laundering and other crimes.

Crypto lending regulation

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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 outrightly nor given full permission. In these areas, certain use is prohibited while others are permitted. Prohibiting banks and other financial institutions from dealing in cryptocurrencies or offering services to individuals/businesses dealing in cryptocurrencies, or banning cryptocurrency exchanges are examples of implicit bans.

In a recent report, there are 21 countries that have placed implicit bans on the usage of cryptocurrency. There is a possible occurrence of the government veering towards enforcing a total ban in these areas. If this happens, crypto lending in these areas will undoubtedly become illegal.

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Still curious? Click here to see the areas where crypto lending is illegal.

2. Federal securities laws and regulations

Even in regions where cryptocurrencies are recognized and their full use is permitted, there is a regulatory framework surrounding them, particularly the application of tax laws and anti-money laundering and counter-financing of terrorism laws (AML/CFT laws) to cryptocurrencies.

In the United States, crypto is grappling with bigger regulatory problems as multiple agencies on the federal and state level are looking to exercise some form of financial oversight on crypto.

3. Actions of the Securities and Exchange Commission

Securities regulators such as the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) have targeted the crypto industry.

On August 6, 2021, the SEC charged and issued a cease-and-desist order on 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 circumvents the existing law by offering unregistered securities to users, the lending platform is barred by the Security and Exchange Commission, thereby making crypto lending with that platform illegal.

4. Actions of the Internal Revenue Service

The internal revenue service (IRS) has been relentlessly tracking the crypto activities of individuals, institutional investors, and organizations.

In 2016, they summoned Coinbase, a cryptocurrency exchange, to provide user information on who bought, sold, sent, or received cryptocurrency of at least $20,000 in value in one year.

Through this information, the IRS sent 10,000 compliance letters to taxpayers advising them of their failure to report cryptocurrency transactions properly.

Taking a crypto loan has allowed individuals to evade paying capital gains tax on their crypto earnings. This is because receiving cash for depositing crypto as collateral is not a taxable event. Spending the loan is also not a taxable event.

Since the IRS monitors every facet of crypto, including Mining, NFTs, and even decentralized finance, they might turn attention to crypto lending products and services, seeking out ways to apply taxation principles to those who use it to evade capital gain 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 accommodate the use of cryptocurrencies, it means they are welcome to its use case and might fully adopt it in the future. Crypto lending services will thrive in these regions.

In Europe, crypto and other services are welcome because of the accommodating nature of that region. Further, regulation has made it clear that crypto is an accepted financial instrument and a recognized asset class.

The 5th Anti-Money Laundering Directive (5AMLD) regulatory framework introduced in Europe in 2020 recognized crypto service providers as entities that need to conform to the same anti-money laundering and counter-terrorist financing requirements as mainstream financial institutions.

2. Settlements

The inclination of the SEC to reach settlements with some crypto firms that circumvent the law shows that crypto might not become outright illegal.

In the United States, BlockFi, a crypto lending platform, settled with the SEC because they sold unregistered securities to their users, thereby violating the investment company act of 1940. Upon paying the fines, the SEC allowed BlockFi to create a newly registered lending product for the inhabitants of the United States.

This move highlighted the positive stance of the federal government and securities regulators towards the legal adoption of crypto lending products and cryptocurrencies in general.

3. Cryptocurrency adoption

Cryptocurrency is currently being adopted and accepted in various locations around the globe. Some nations are also pushing for it to be recognized as a legal tender in their region. As the crypto world evolves, more nations will be willing to integrate digital money into their financial system. Thus in that atmosphere, cryptocurrency trading and crypto lending will thrive.

Summary

Regulators are cracking down on crypto and its services in a bid to exercise control of this rapidly growing space. The SEC and IRS are leading the charge. Their policies also offer some form of investor protection.

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

In other areas, though, crypto adoption has taken a full swing while many other nations recognize it as an asset class. In these places, even though crypto lending platforms need to abide by the securities act, crypto lending is welcome to borrowers and open to those who want to earn interest by providing their cryptocurrency holdings as collateral.

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