Crypto Industry Fears Regulatory Backlash Amid Lending Crisis – POLITICO

A new crypto crisis is looming – and companies fear that the ax of regulators is about to fall.

One of the biggest lenders in the crypto market, Celsius Network, is struggling as the booming sector turns sour. The lender announced early Monday morning that it was suspending withdrawals and crypto trading functions due to “extreme market conditions”, a move that will prevent people from accessing the digital assets they had deposited with the lender. ‘company.

Celsius’ decision effectively froze the digital assets of more than 2 million customers, many of whom had made deposits on the promise of advertised annual returns of up to 18% – rates unprecedented among traditional bank accounts.

A collapse could leave these depositors penniless.

The company’s balance sheet has been in free fall since the end of last year, shortly after raised $750 million major venture capitalists and a major Canadian pension system, with reported assets falling 50% since the end of December. Celsius’s digital token, CEL, has also seen its price deteriorate, from nearly $4 at the end of 2021 to just 0.32 cents now. Another competing company has already proposed to buy back certain assets in light of “what appears to be the insolvency” of Celsius.

Crypto companies are already on high alert after weeks of uncertainty in a market downturn that has seen the value of the broader market fall by two-thirds since peaking at $3 trillion in early November. Crypto markets are also reeling from the recent collapse of TerraUSD, a so-called stablecoin whose popularity has skyrocketed thanks to dizzying returns promised via a connected lending platform. The drop in Celsius did little to help the market turmoil, with bitcoin’s price falling further to around $22,000, a far cry from its November high of $67,000.

Crypto companies are already on high alert after weeks of uncertainty in a market downturn that has seen the value of the entire market fall by two-thirds since peaking at $3 trillion in early November | Jack Taylor/Getty Images

The current crisis has sparked new fears that market regulators are putting a stop to nascent crypto lending firms that have positioned themselves as alternatives to traditional banks.

“I’m quite angry at the carelessness[ly] Celsius is doing its business,” Crypto Finance chief executive Patrick Heusser said in an email, referring to the company’s promises of high returns. regulators will result (instead of reflected).”

“Ultimately, the consumer is (again) punished as well as all serious service providers who act thoughtfully and in a compliant and regulated manner,” he added.

Heusser is far from alone. At a fintech conference in Amsterdam last week, attendees working for crypto firms whispered worries about Celsius and feared a regulatory backlash. Among the few people comfortable talking about it publicly was Stephen Richardson, vice president of product strategy and business solutions at crypto firm Fireblocks.

Regulators would be “very quick” to deal with a crypto lending crisis, he told the audience, especially after the recent stablecoin market crisis that saw investors lose billions. “We have to be careful there,” he said.

Celsius did not respond to POLITICO for comment.

A watchful eye

Market volatility is nothing new for most crypto companies. This time, however, is different, as regulators on both sides of the Atlantic are watching – and the overall market sentiment is much more bearish.

For more than a year, US state and federal agencies have been stepping up their efforts around lending activities, which are more prevalent in the United States. BlockFi agreed to pay $100 million to the Securities and Exchange Commission and nearly three dozen state regulators last year. to settle charges that he operated an illegal loan business, while Celsius and other firms were slapped with cease and desist letters from at least four state regulators.

“It’s mind-boggling to me,” former SEC Internet Bureau Chief John Reed Stark said in an interview, adding that lending platforms have become “a scourge with no regulatory oversight, no consumer protections.” No fiduciary infrastructure of any kind.”

The EU executive and lawmakers in Brussels are also watching things as they inch closer to a new bill to regulate European crypto asset markets, dubbed MiCA.

The bill will set the standard for stablecoins, digital assets that are pegged either to a national currency or to a basket of liquid assets to hold their value stable. The recent collapse of TerraUSD has strengthened lawmakers’ resolve on these rules, especially as the “algorithmic” stablecoin has relied on financial engineering to maintain the link to the greenback.

MiCA does not target crypto loans. But it sets strict industry standards and oversight for crypto token companies moving to Europe after the rules come into effect. The Celsius crisis shows the need to strengthen these draft rules to ensure that pre-existing crypto companies are also affected, according to Green MP Ernest Urtasun.

Celsius crisis shows need to strengthen these draft rules to ensure pre-existing crypto companies are also affected, says Green MP Ernest Urtasun | Ozan Kose/AFP via Getty Images

“Mis-selling scandals are on the rise in the crypto sector as consumer and investor protection rules for [retail investors] do not respond adequately to the reality of this new sector,” said the Spaniard, who played an influential role in negotiating MiCA and anti-money laundering rules for crypto in the European Parliament.

He also took aim at a grandfather clause in the European Commission’s MiCA proposal which “would prevent the application of the new set of EU rules to players already in operation”. The move would in theory leave Celsius exempt from MiCA, as the lender already has an office in Lithuania. “Cases like Celsius once again show the need to remove such a provision,” he said.

Collateral damage

The main concern of market entrepreneurs is that regulators could restrict or completely ban crypto lending. While the EU has no uniform rules for loans outside of mortgages and credit, the fear is that the European Commission will feel pressured to shut down the sector. This is unlikely to happen in the rest of its legislative cycle, which ends in 2024, unless the crisis is too big to sit idle.

Some lenders, such as Celsius – which has billed itself as a bridge between traditional banking models and crypto-based decentralized finance – have lured retail investors to their platform by announcing high returns if they deposit their crypto assets with them. Like traditional banks, these platforms lend these funds to borrowers in exchange for collateral that is forfeited if the loans are not repaid.

Many of these loans are used by large crypto investors to purchase more digital assets, as their interest rates are much lower than they would otherwise be in traditional financial markets. This strategy can bring huge returns on crypto investments during boom times. The losses, however, can be massive if the market turns sour.

Like its competitors in the industry, Celsius uses its deposits for loans and takes advantage of the difference in interest.

But authorities in New Jersey and Texas have found that the platform also generates revenue “through cryptocurrency trading, lending, and borrowing,” as well as “engaging in cryptocurrency trading.” ownership” – the practice of investing for direct gain in the market rather than on behalf of clients. Their concern is that Celsius has become overexposed by these practices, leaving its depositors on the hook.

“We are now seeing the negative effects of unregulated lending platforms…which are under-collateralized” in the crypto market, said Marshall Hayner, CEO of Metal Pay, a US-based crypto payments company. .

Hayner worries that the regulator’s ax will also strike crypto lenders in the decentralized finance (DeFi) space, where computer programs execute and record transactions in multiple online ledgers without the use of a central entity.

DeFi borrowers often have to provide collateral that is worth more than the loan they seek from a consortium of crypto investors, much like peer-to-peer lending.

“It’s important that we protect innovation for crypto in America, while preserving the safeguards we’ve come to expect in traditional banking and financial services,” Hayner said. “A good step is a solid framework for stablecoin regulation that is not reactionary in nature but thoughtful and pro-competitive.”

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Janet E. Fishburn