Crypto firms seek clearer U.S. rules on their interest-bearing products

[April 27, 2022]  By Hannah Lang

(Reuters) - Cryptocurrency companies said they remain unsure of U.S. regulations governing products that allow customers to earn interest on holdings instead of trading them, months after such an interest-bearing product drew a $100 million fine from a federal regulator and state governments.

In February, New Jersey crypto company BlockFi agreed to pay $100 million in a landmark settlement with the U.S. Securities and Exchange Commission and state authorities who said its interest-bearing product qualifies as a security and should have been registered.

Still, many digital asset companies providing such products said this month the rules remain unclear to them and they are uncertain when they should register such offerings, which are growing more popular and which many firms launched within the last year.

Most firms have tried to structure the interest-bearing products to avoid the need to register them with the SEC, a process that takes time and entails ongoing disclosure and reporting obligations. That effort might set them up for a clash with the agency as it increases scrutiny of the crypto industry.

BlockFi plans to offer an alternative yield product, which it said it would register first. The company and the SEC said the deal should provide a roadmap for other companies.

"Our resolution with the SEC is a key step to achieving regulatory clarity for not only BlockFi but the crypto ecosystem as a whole, which is necessary for long-term mass adoption of crypto financial services," a BlockFi spokesperson said in a statement.

Industry executives said the SEC should clearly define what constitutes a security rather than using enforcement actions to set boundaries.

SEC registration of crypto products is "not always a path that others can take for various different circumstances," said Nicholas Losurdo, a partner at Goodwin and former counsel to recently departed SEC Commissioner Elad Roisman. “The better way would be for the SEC to actually just articulate a clear message of what it expects."

Securities, as opposed to other assets such as commodities, are strictly regulated and require detailed disclosures to inform investors of potential risks. The Securities Act of 1933 outlined a definition of the term "security," yet many experts rely on two U.S. Supreme Court cases to determine if an investment product constitutes a security.

The SEC did not respond a request for comment, but SEC Chair Gary Gensler has said most cryptocurencies are securities as defined in those cases. Many in the industry disagree, citing other interpretations of the law.

Gemini, a crypto exchange, offers an interest-bearing crypto product that was approved by the New York State Department of Financial Services. Noah Perlman, chief operating officer at Gemini, said that approval distinguishes it from BlockFi's product and means the settlement did not affect them.

Representations of cryptocurrencies Bitcoin, Ethereum, DogeCoin, Ripple, Litecoin are placed on PC motherboard in this illustration taken, June 29, 2021. REUTERS/Dado Ruvic/Illustration

“You've got an industry that wants to work with regulators, and yet you've got regulators who are not in the habit of giving advisory opinions," he added.

The state regulators that ordered BlockFi to cease offering its product issued a similar order in September to crypto company Celsius Network, calling its Celsius Earn product an unregistered security. CEO Alex Mashinsky did not say whether Celsius would register the product, but told Reuters early this month he was not concerned the SEC would sue because Celsius is a "much more conservative company than BlockFi".

He also said BlockFi "didn’t hurt anyone" with its product.

Since that interview, Celsius has stopped accepting new transfers to its Earn accounts from U.S. retail investors. The company did not respond to further requests for comment.

Several crypto companies are exploring limiting their offerings so they would be clearly exempt under the SEC registration rules, said Richard Levin, chair of the fintech and regulation practice at Nelson Mullins.

Circle Internet Financial, for example, only offers its yield instruments to institutional investors.

"If a yield product is paying dividends to consumers, it's very likely going to be treated like a security. We agreed with that as we were structuring Circle Yield," said Dante Disparte, chief strategy officer at Circle.

Coinbase, the largest U.S. crypto exchange, scrapped plans to launch a crypto-lending product after the SEC in September threatened to sue.

Some crypto companies said they were being cautious in light of the SEC's tough stance.

Kraken, for example, would like to offer an interest-bearing product but the company is wary since the SEC has not provided guidance, said Marco Santori, the company’s chief legal officer.

Bitstamp, a crypto exchange that has a New York virtual currency license, hopes to offer a yield product to U.S. institutional investors, but believes it might need additional licenses and approval from New York regulators.

"Some crypto players in the U.S. have gotten in big trouble with how they've managed lending and credit-type offerings," said Bobby Zagotta, CEO of Bitstamp USA. "We don't want to go there, so we're going to be super diligent."

(Reporting by Hannah Lang in Washington; editing by Michelle Price and David Gregorio)

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