Crypto lending products flourish in UK amid pushback from US regulators
This week crypto platform Blockfi was ordered to pay $100m in a settlement with US regulators, marking the SEC’s first enforcement action against crypto lending accounts.
Blockfi faces mammoth fines for failing to register its interest-earning lending account, which attracted some $10.4bn from some 572,160 investors, with regulators. The SEC has banned Blockfi from issuing interest accounts (BIAs), which earn yield for investors when their capital is borrowed, until it complies with regulation.
The punitive decision is the latest move in a campaign against crypto lending products by the US securities regulator. The SEC also successfully blocked the launch of Coinbase’s lending account in September by threatening the crypto exchange with legal action.
“Crypto lending platforms offering securities like Blockfi’s BIAs should take immediate notice of today’s resolution and come into compliance with the federal securities laws,” commented Grubir Grewall of the SEC on Monday, signalling the regulator’s intention to crack down on unregistered lending products.
The sense of urgency conveyed by US regulators has shown little sign of penetration in the UK. Britain’s financial watchdog has hitherto taken a hands off approach to regulating digital assets and is yet to take a definitive stance on crypto lending accounts. While the Financial Conduct Authority (FCA) has a limited role registering UK-based crypto asset exchanges for anti-money laundering purposes it lacks consumer protection powers for digital assets.
“Cryptoassets are unregulated and high-risk, which means people are very unlikely to have any protection if things go wrong,” an FCA spokesperson said in response to City PM’s request for a comment on crypto lending. “This is why we repeatedly warned people that if they invest in them, they should be prepared to lose all their money.”
Regulatory arbitrage on either side of the Atlantic allows UK-based firms to offer crypto lending accounts to clients undeterred. One such firm is BVNK, a UK-based digital asset banking platform for global businesses which launched in October 2021.
The company’s yield accounts, which require a minimum deposit of $50,000, generate returns for investors from margin lending, a process which typically involves offering collateralized loans to traders looking to open leveraged positions. A quarter of the company’s 100 clients have already signed up.
“I don’t think it’s a risky process,” Chris Harmse, the co-founder and managing director for BVNK, told City PM. “The beauty of the crypto market is a lot of those lending positions are over collateralized – so for every $1 they lend, they place $1.50 of Bitcoin as collateral against those positions.”
Harmse, who claims the company’s yield accounts typically provide annual returns of “four per cent to eight per cent,” said that recent statements made around crypto lending accounts “display a fundamental lack of understanding of the processes and assets at play.”
His comments come after the SEC took aim at crypto yield accounts in a blog post this week. The regulator warned customers that despite surface level similarities to interest earning bank accounts, crypto lending accounts carry greater risk because deposits are not insured and capital is lent to crypto related products, exposing investors to the risk of volatility.
While Harmse stressed the importance of regulation protecting retail investors he said his firm’s yield products allow “businesses to generate interest” without being “exposed to the volatility of crypto markets.” BVNK has also recently partnered with crypto start-up Copper, a crypto custodian with over 400 institutional clients, to insure deposits “do not leave secure custody and are insured while they’re held there.”
“We’ll take it as it comes,” he said, referring to the possibility of UK regulation. “If you run your business anticipating every new little nuance you might struggle in today’s regulatory environment.”
Read more: FCA says UK firms need ‘clarity’ on cryptoassets as it consults on regulation