Lending Platforms Continue to Meet Their Demise in the United States

Lending platforms have been some of the hardest hit crypto platforms by the market meltdown, ecosystem implosion, and insolvency in the past year in the crypto space. Celsius halted withdrawals following the TerraLUNA-induced Bitcoin crash in mid-June. BlockFi also halted withdrawals after citing significant exposure to FTX, which was followed by a chapter 11 bankruptcy filing on November 28. Regulators in some jurisdictions have been giving lending platforms a hard time operating. In the US, lending platforms are under close watch by regulators who have failed on their part to define clear rules and regulations, but often charge and fine these platforms for failing to meet “obscure” regulatory requirements.

The treatment meted out to lending platforms in the US by US regulators has led to some crypto lending platforms closing some of their products to US-based customers, or considering leaving the US entirely.

US Regulators, the Lending Platforms’ Nightmare

After 18 months of talks with the US federal and state regulators, crypto lending platform NEXO is calling it quits in the US owing to a lack of regulatory clarity. The firm announced that starting today, it will discontinue its Earn Interest Product in 8 additional US states – Indiana, Kentucky, Maryland, Oklahoma, South Carolina, Wisconsin, California, and Washington; in the meantime, customers in these jurisdictions will still have access to other NEXO products and services.

NEXO had previously announced changes to the Earn Interest Products following the announcement of new rules by the US Securities and Exchange Commission (SEC) on crypto-asset interest-bearing accounts in the US, on February 14. NEXO played by the new rules by disabling interest earnings for US-based clients and suspending new registration on the Earn Interest Product for all US clients. NEXO also off-boarded clients from the states of New York and Vermont, while restructuring the Earn Interest Product into a morphed product that it calls “Earn Interest Product 2.0.” These steps were taken by NEXO to meet the demands of US regulators.

The SEC’s Office of Investor Education and Advocacy and the Division of Enforcement’s Retail Strategy Task Force issued an Investor Bulletin to educate investors about risks with accounts that pay interest on crypto-asset deposits, in other words, “accounts at crypto lending platforms,” on February 14. The SEC also announced, on the same date, that it had charged crypto lending firm BlockFi with failing to register the offers and sales of its retail crypto lending product, which is a violation of the registration provisions of the Investment Company Act of 1940. BlockFi agreed to settle the SEC charges by paying a $50 million penalty and paying another $50 million in fines to 32 states. The SEC called interest-bearing accounts offered by crypto lending platforms, such as BlockFi Interest Account (BIA), securities under applicable law.

As the latest company to express its frustration with US regulators, NEXO listed some steps it has taken over the years to comply with and placate the SEC. Some steps NEXO said it has taken to cooperate with regulators include:

• NEXO was among one of the earliest crypto companies to register its token sale, which it held in 2018, with the SEC.
• When the New York Attorney General together with seven state securities regulators sued NEXO for failing to register with the state as a securities and commodities broker, NEXO ceased its operations in the state.
• NEXO suspended deposits from US-based clients following the SEC’s charge against BlockFi and the $100 million settlement that followed. NEXO has also tried to polish its Earn Interest Product to meet US regulatory requirements.

NEXO says it has spent innumerable hours engaging with regulators in an effort to identify a path forward where Nexo services, notably its Earn Interest Product, could be made available in the US in a compliant and continuous manner. NEXO has stated that the recent change in the attitude of regulators and the lack of coordination among regulators has made it impossible to operate efficiently and to provide the expected value for its clients. The confusion and contradiction among US regulators over crypto lending products have led to NEXO’s decision to commence a gradual departure from the US.

Crypto Lending Thrives Elsewhere

As US regulators struggle to set a clear regulatory framework around crypto lending products leading to the demise of lending platforms, crypto lending is getting all the boosts it needs in Latin America – thanks to high-interest rates and inflation. As loans from traditional banks have become extremely difficult and expensive to get in Latin America, citizens have turned to crypto lending platforms to get credit. Crypto credit has created a new wave of digital asset adoption in the region.

The ease of access, void of the lengthy bureaucracy a customer might go through in getting traditional loans, and the round-the-clock availability of crypto loans have created an easy-to-access credit opportunity for many of the world’s unbanked and underbanked.