• US regulator has launched an investigation into three companies as it considers whether their crypto lending products fall under securities.
• BlockFi and Celsius are among other companies that have received strict warnings from several state regulators for these offerings.

The US Securities and Exchange Commission (SEC) is reportedly looking into the activities of three crypto companies that offer crypto lending products. In the list are crypto exchanges Voyager Digital and Winklevoss-owned Gemini Trust, along with the crypto lender Celsius Network, according to information from unnamed sources. 

The investigation is said to be part of a wider inquiry into companies that pay users interest on crypto token deposits, Bloomberg reported. At present, none of these firms have been accused of any wrongdoing. However, the regulator is considering whether their crypto lending products should be registered with them as securities.

Are crypto lending products securities?

Just like banks, crypto lending companies allow customers to deposit their cryptocurrencies, giving them an interest in return. These lending companies loan the deposited cryptocurrencies to institutions to cover their crypto trading positions. However, different from banks, such firms offer much higher and attractive interest rates. Additionally, some crypto loan platforms, especially the decentralized ones, do not require users to provide KYC (Know Your Client). Instead, they utilize the technology of smart contracts to automatically conduct financial services between users anonymously. 

The SEC, so far, has been fairly lenient with crypto lending products in the country. Most of the time, it has issued warnings on the likelihood of such offerings being labeled securities. 

Its harshest action has been when it threatened to sue leading crypto exchange Coinbase when it proposed a similar offering last year. The company noted that it had informed the regulator of its plans beforehand. Moreover, in an attempt to defend itself, Coinbase said there were numerous other crypto players in the financial industry offering crypto lending products, without legal action being taken against them. Ultimately, the exchange was forced to scrape out the program to evade a possible lawsuit.

On the flipside

Despite the SEC’s relative dormancy, several states have not been as friendly to these and other lending firms. Last July, within a week, crypto unicorn BlockFi faced three allegations of violating state securities laws by regulators in Texas, Alabama, and New Jersey. One of the notices served to the company says regulatory compliance requires the “registration of securities, the registration of dealers and agents, and the truthful disclosure of all known material facts.” Celsius also came under the radar of regulators in Kentucky, Alabama, Texas, and New Jersey. These firms and others have even been threatened with business closure.

At present, the SEC has not officially confirmed its latest probe. However, Voyager, Gemini, and Celsius have said that they are fully cooperative with any investigation.