Crypto Lending Regulation

Learn about crypto lending regulations currently being enforced in different parts of the world.

Monetary authorities are a vital part of any financial system. They ensure that institutions within the financial sector conform to existing laws. They may also develop new regulations to maintain control over new financial systems.

A lot of people get confused about whether crypto lending is legal. But the truth is that most countries want to regulate crypto instead of banning it. Their primary goal is to create a safe space for investors.

Financial regulators worldwide are becoming more interested in the crypto industry. Investors' adoption of crypto products seems to be a primary reason for this. They are also concerned about the number of scams and frauds in the crypto industry.

This has led them to begin regulating key aspects of the crypto industry. There has also been a rapid expansion of crypto lending in the past few years. So, financial regulators are focusing more attention on this sector.

This article examines crypto regulations in various parts of the world. We will also highlight how these regulations affect the crypto lending sector.

United States

President Biden recently signed an executive order that involves cryptocurrencies. This order will ensure the responsible development of digital assets. It will likely benefit the crypto industry in the US. A first of its kind, this executive order is the pace-setter crypto regulation in the country. Here are the things the order focuses on:

  • Consumer protection

  • Investor protection

  • Financial inclusion

  • Responsible innovation

  • Financial stability and system risk

  • Prevention of illicit financial activities

  • U.S. leadership and competitiveness

Also, the United States government has developed many financial regulatory agencies. These agencies regulate various financial products, including cryptocurrencies. Each agency has its jurisdiction. Yet, they all work together to protect US citizens who choose to invest in crypto. Some of these agencies are:

The United States Financial Crimes Enforcement Network (FinCEN)

This government agency analyzes all sorts of financial transactions in the country. It also ensures that money is not laundered or used to finance terrorism. Thus, it requires all financial services providers to register with the government. They also have to follow KYC and AML regulations.

The FinCEN views digital assets as a means of transmitting funds. So, all crypto lending providers in the country must also register with it.

The Internal Revenue Service (IRS)

This is the United States body that collects all forms of internal revenue. It does not have explicit laws on cryptocurrencies but views them as properties. Thus, holders of crypto assets must pay taxes on various crypto transactions.

An example is if you lend your crypto assets and get interest payments. In that case, your interest is taxable under the income tax rule. Also, if your lent crypto appreciates in value and you sell it, you will pay capital gains tax.

The United States Securities And Exchanges Commission (SEC)

This is the United States regulatory body that makes most of the headlines in the crypto space. As the name shows, it is in charge of regulating securities and exchanges in the US. A security is any financial asset that one can trade. In the US, this also applies to most cryptocurrencies. So, the SEC takes a keen interest in regulating crypto assets. Let us consider two cases that illustrate this.

Case One - SEC Vs. Coinbase

On September 1, 2021, the SEC threatened to sue the Coinbase crypto exchange. The threat was because of Coinbase's proposed Lend product. Gary Gensler, the Chairperson of the SEC, championed this threat.

According to Gary, Coinbase’s proposed product qualified as a security. Thus, Coinbase should have registered it with the government.

Despite its initial objections, Coinbase bowed to the pressure. Citing regulatory clarity, the exchange announced the postponement of its product. Score one for the SEC!

Case Two - SEC Vs. BlockFi

BlockFi launched its interest accounts in 2019. These accounts allowed users to earn variable rewards by lending their crypto assets.

The BlockFi Interest Account (BIA) is a crypto lending product that rewards investors with up to 7.5% APY on stablecoins.

The (BIA) program was a huge success. It raised about $14.7 billion in two years.

On February 14, 2022, the SEC released a statement on the matter. The statement detailed its legal actions against BlockFi for its BIAs. This is the summary:

  • The SEC charged BlockFi for failing to register the BIA program with the government. According to the body, The BIAs are securities and must register with the government.

  • BlockFi as a body was not registered with the US government, even though it is an investment platform.

  • BlockFi provided misleading information on its website. This was because BlockFi once said that most of its loans are over-collateralized. That was not true.

BlockFi accepted all the charges and agreed to pay a $100 million fine. It also agreed to register its investment platform with the US in 60 days. Another score for the SEC!

The SEC’s success in these matters is somewhat bittersweet for crypto enthusiasts. They show that the US government is alert to protect crypto users in its jurisdiction. True, these regulations may seem challenging now. But, in the end, the crypto world will be better for it.

Europe

The crypto lending sector in Europe is mainly unregulated. Still, crypto platforms must register their operations with financial regulators in European countries.

The European Commission strives to control crypto transactions within its domain. To that end, it proposed the adoption of a regulatory body by member states. The name of the body is Markets in Crypto-Assets Regulation (MiCA).

This financial regulation provides straightforward guidelines for operating the crypto industry. Additionally, it details new licensing requirements for European-based crypto platforms.

In the UK, crypto exchanges must register under the U.K. Financial Conduct Authority (FCA). Also, these exchanges cannot offer crypto derivatives trading to investors. There are no specific guidelines for crypto lending firms in the EU and Britain.

Australia

Australia considers cryptocurrencies as legal property. The Australian Transaction Reports and Analysis Centre (AUSTRAC) is its regulatory body. All crypto exchanges operating in Australia must register with AUSTRAC. These platforms are also required to meet specific anti-money laundering laws. Currently, Australia does not have any crypto lending laws.

South Korea

The Financial Supervisory Service (FSS) is the crypto regulatory body in South Korea. This financial regulator ensures that crypto-based platforms follow strict CFT/AML laws.

The Korea Financial Intelligence Unit (KFIU) is another body that deals with crypto. This agency operates under the Financial Services Commission's (FSC) direction. Yet, there are no specific guidelines for crypto lending in South Korea.

Conclusion

Financial regulators worldwide are more focused on providing guidelines for the crypto industry. But most of them are now turning their attention to the lending space.

In the meantime, the US Securities and Exchange Commission is the most active. It has already started regulating the crypto lending space and related sectors. Other agencies are watching, that's for sure. They also will be looking to emulate the SEC in these areas.

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