SEC And Crypto Lending

Steps taken by the SEC to regulate the activities of lending platforms and plans for the crypto markets in the U.S.

The crypto lending industry has enjoyed massive adoption among investors and traders. Despite its immense growth over a short period, many still view this industry with skepticism. These skeptics include financial regulators and governmental institutions looking to regulate the crypto lending industry.

Many have expressed doubts about the long-term prospects of an unregulated crypto lending industry. As a result, many individuals are pushing for laws designed to guide the activities of crypto lending platforms. These concerns also extend to the larger crypto space.

Legislation in this space aims to protect investors' funds and ensure all lending activities comply with financial laws prescribed by regulators worldwide.

To effectively regulate the crypto lending space within the United States, financial regulators at the SEC have turned their attention to products and services offered by crypto lending platforms operating within their jurisdiction.

Before examining the steps taken by the SEC to regulate the activities of lending platforms in its territory, we will briefly describe the role of the SEC in the U.S. financial markets. Also included in this article is information about the SEC's plans for the crypto markets in the U.S.

What does the U.S. Securities and Exchange Commission (SEC) do?

Established by the U.S. Congress in 1934, the Securities and Exchange Commission was the first federal regulator for the securities market in the United States. The SEC is responsible for monitoring and regulating the securities market in the U.S.

The SEC is also tasked with protecting investors and ensuring the securities market operates smoothly and fairly. The SEC ensures that all public companies conform to its public disclosure policy to protect investors.

They also prevent securities companies under their jurisdiction from engaging in manipulative and fraudulent practices. This federal regulator also maintains an oversight role when it comes to corporate takeovers in the U.S.

As a result of the extensive adoption of digital assets worldwide, the SEC has begun to develop policies designed to govern different sectors of the crypto markets. Like many financial institutions seeking to regulate this market, the SEC plans to enact laws intended to protect crypto investors.

SEC vs. crypto assets

As previously stated, the SEC is developing laws that will help guide US-based crypto platforms. This move is primarily due to the belief among financial regulators at the SEC that most digital assets meet all the criteria necessary to be defined as securities.

At a meeting held on April 4, 2022, SEC chair Gary Gensler noted that many of the crypto assets traded in the crypto markets today could be considered securities. The SEC chair argues that since crypto-assets can be defined as securities, crypto traders should be offered similar protections as investors who trade traditional securities.

During his speech, Gensler also announced several new initiatives to regulate the crypto lending space within a short period of time. Based on these initiatives, the SEC plans to register and regulate crypto exchanges doing business in the U.S.

Additionally, this regulator plans ways to remove complete control over asset custody from crypto exchanges to minimize investor risk. Currently, crypto exchanges hold total control over the digital assets of their users. However, with the implementation of these new regulations, some of these digital assets will be owned by another party.

To achieve all this, the SEC plans to partner with the Commodity Futures Trading Commission. Both agencies will identify and regulate platforms trading crypto-based commodity tokens and security tokens.

We must clearly state that the SEC has yet to implement most of these new initiatives. In the meantime, the agency continues to monitor the activities of crypto platforms that offer products that qualify as securities.

The SEC has been observing the crypto lending landscape in recent months. Recently, this agency filed charges against some leading crypto platforms in this space. They include platforms like Bitconnect, Coinbase, and BlockFi.

The following two sections of this article will consider charges filed by the SEC against crypto exchange Coinbase and BlockFi Lending LLC.

SEC vs. Coinbase

On September 1, 2021, the SEC sent a Wells Notice to Coinbase regarding the company's proposed Coinbase Lend program. If you are new to this space, a Wells notice is a document issued by regulators to notify a company that they intend to sue.

In this case, SEC chair Gary Gensler stated that his agency considers the Coinbase Lend program qualified to be considered a security. However, he refused to provide additional information on the criteria used to determine security.

According to Gensler, Coinbase is not registered with the Securities and Exchange Commission, so it is an unregistered investment company.

For its part, Coinbase argued that its lending program could not be considered a security. In a blog post published on the Coinbase Medium account, Paul Grewal, Chief Legal Officer for the exchange, stated that customers would not be investing funds into the lending program.

Instead, users can only lend the USDC they hold in their accounts. According to Paul, the Lend program rewards customers with interest. Additionally, there is a guarantee that investors' funds are safe and will be repaid upon request.

Shortly after receiving the notice from the SEC, Coinbase halted the launch of its crypto lending product. This was done to prevent a lengthy court case with the SEC. For now, Coinbase plans to seek clarity over financial regulations that apply to the crypto sector.

SEC vs. BlockFi interest accounts

On February 4, 2020, the SEC announced that it had settled an enforcement action with BlockFi Lending LLC. At the time of the report, there were three main reasons for the enforcement action. They include:

Failure to register the BlockFi Interest Accounts (“BIAs”)

Launched in 2019, the BlockFi interest accounts allowed investors to lend out their crypto assets for a variable monthly interest payment as a reward. This investment option enjoyed huge success, with the total BIA investor assets hitting $14.7 billion by 2021.

According to the SEC, the BlockFi interest account was an unregistered security. Before this incident, regulators from New Jersey and other states alerted BlockFi that the company had been selling unregistered securities.

In this instance, the SEC determined that BlockFi's interest account qualifies as a security by using the Reves test and the Howey test. Under the Reves test, the BIA can be viewed as a note. While this crypto lending product falls under investment contracts when viewed using the Howey test.

BlockFi failed to register as an investment company in the United States

In its second charge, the SEC stated that BlockFi violated the investment company act by failing to register its platform in the United States. The charges identify BlockFi as an investment company due to two main factors.

  • BlockFi issued securities using its interest accounts as an investment vehicle.

  • BlockFi repeatedly invested, owned, and traded in investment securities worth over 40% of its portfolio.

Providing false and misleading statements

BlockFi was also charged with violating the securities act by failing to provide accurate information on its institutional loans.

For a significant amount of time, the information presented on the BlockFi website has been designed to give borrowers the impression that institutional loans from this platform are usually over-collateralized. However, that information was misleading since many of these loans were not over collateralized.

This statement was deemed false and misleading by the SEC. Users couldn't properly assess the risks attached to their investments in case BlockFi’s institutional borrowers defaulted on their loan repayments.

BlockFi Settlement

Accepting all of the charges, BlockFi agreed to pay $100 million in total. The SEC would receive $50 million as a civil penalty, while another $50 million would be paid to state regulators involved in this matter.

Additionally, BlockFi agreed to comply with the investment company act by registering its platform within 60 days. This process would also mean that this crypto lending platform will ensure it registers with state regulators. The company also plans to register a new investment product called the BlockFi Yield with the SEC.

Finally, BlockFi has halted the creation of new BIA accounts for its customers located in the U.S. Additionally, current users of the interest accounts can not add new assets to their investment portfolios.


Financial regulators have begun to pay keen attention to the crypto markets to regulate the space. In the United States, the Securities and Exchange Commission is leading this charge. This agency has started to regulate crypto lending platforms that offer assets that can be considered securities.

So far, the SEC has successfully prevented the launch of a lending program by Coinbase. They have also reached a $100 million enforced settlement with BlockFi using existing federal securities laws.

The SEC's settlement with BlockFi underscores the use of existing financial laws to regulate crypto exchanges and lending platforms that offer crypto-assets that qualify as investment securities.

Moreover, with the enactment of new laws for regulating the crypto space now in full swing, users will soon witness significant changes in the crypto space within the United States. These changes will also apply to the crypto lending industry.