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Crypto firms seek clearer US rules on their interest-bearing products

April 27 (Reuters) – Cryptocurrency companies said they were still unsure about U.S. regulations governing products that allow customers to earn interest on holdings instead of trading them, months later that such an interest-bearing product was fined $100 million by a federal regulator and state governments. .

In February, New Jersey crypto firm BlockFi agreed to pay $100 million in a landmark settlement with the U.S. Securities and Exchange Commission and state authorities, who said that his interest-bearing proceeds were considered a security and should have been registered.

Yet many digital asset companies providing such products said this month that the rules were unclear to them and that they did not know when they should register such offers, which are increasingly popular and that many companies have launched over the past year.

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Most companies have tried to structure interest-bearing products to avoid having to register them with the SEC, a process that takes time and involves ongoing disclosure and reporting obligations. This effort could lead them to 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. Read more

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

Industry executives have said the SEC should clearly define what constitutes security rather than using enforcement measures to set limits.

Registering crypto products with the SEC is “not always a route that others can take in various circumstances,” said Nicholas Losurdo, partner at Goodwin and former attorney for recently deceased SEC Commissioner Elad Roisman. . “The best way would be for the SEC to just articulate a clear message of what it expects.”

Securities, unlike other assets such as commodities, are strictly regulated and require detailed information to inform investors of potential risks. The Securities Act of 1933 defined the term “security,” but many experts rely on two U.S. Supreme Court cases to determine whether an investment product constitutes a security.

The SEC did not respond to a request for comment, but SEC Chairman Gary Gensler said most cryptocurrencies are securities as defined in these cases. Many in the industry disagree, citing other interpretations of the law.

Gemini, a crypto exchange, offers an interest-bearing crypto product that has been approved by the New York State Department of Financial Services. Noah Perlman, chief operating officer at Gemini, said the approval sets it apart from BlockFi’s product and means the settlement hasn’t affected them.

“You have an industry that wants to work with regulators, and yet you have regulators that aren’t used to giving advisory opinions,” he added.

State regulators who ordered BlockFi to stop offering its product issued a similar order in September to crypto firm 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 earlier this month he was not concerned the SEC would sue because Celsius is a “much more conservative company than BlockFi”.

He also said that BlockFi “didn’t hurt anyone” with its product.

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

Several crypto companies are considering limiting their offerings so that they are clearly exempt under SEC registration rules, said Richard Levin, president of fintech and regulatory practice at Nelson Mullins.

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

“If a yield product pays dividends to consumers, it will most likely be treated like a security. We were okay with that when structuring Circle Yield,” said Dante Disparte, Chief Strategy Officer at Circle.

Coinbase, the largest U.S. crypto exchange, dropped plans to launch a crypto lending product after the SEC threatened legal action in September. Read more

Some crypto companies said they were cautious given the tough stance of the SEC.

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

Bitstamp, a crypto exchange that has a virtual currency license in New York, hopes to offer a yield product to US institutional investors, but thinks it may need additional licensing and approval from New York regulators.

“Some crypto players in the United States have had major issues with the way they have handled loan and credit offers,” said Bobby Zagotta, CEO of Bitstamp USA. “We don’t want to go, so we’re going to be super diligent.”

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Reporting by Hannah Lang in Washington; edited by Michelle Price and David Gregorio

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