Fintech

Crypto lending regulation is coming. BlockFi’s SEC deal points the way.

Yield-bearing crypto accounts have existed outside regulatory boundaries. That may be changing.

Cyber piggy bank

Crypto lending has been largely unregulated until now.

Illustration: D-Keine/Getty Images

For years, the crypto industry and the SEC have disagreed on whether crypto products that pay an interest-like yield are securities. That changed Monday when the SEC and BlockFi announced a deal to bring crypto lending in from the cold and turn it into a regulated product.

BlockFi agreed in a settlement with the SEC to pay a $100 million penalty for selling its crypto-lending product without registering it as a security. And it also said it plans to file with the SEC to register its BlockFi Yield product as a security.

The SEC had made its views on crypto lending clear in September when it forced Coinbase to drop its planned Lend product. That came a month after SEC Chairman Gary Gensler made a speech at the Aspen Security Forum in which he said that these products are securities and should be regulated as such.

While the SEC has other crypto issues on Gensler’s to-do list, such as regulating crypto exchanges, crypto lending seems to be at the top right now. According to some legal experts, that’s because it’s a slam-dunk issue for the SEC, where it doesn’t have to wait for congressional action and can instead rely on existing law, a legal principle called the Howey Test and a 2004 Supreme Court case.

BlockFi is one of the largest players in crypto lending and has been offering the service for some time, so it makes sense that the SEC would go after it. There are others such as Celsius and Nexo that offer similar services. Others convert fiat currency that customers deposit into stablecoins, on which there are a variety of ways to offer attractive yields.

With BlockFi agreeing to settle, it’s likely other companies offering crypto lending will either try to make their products compliant or face SEC inquiries.

There are only a small number of regulated crypto yield products, such as Circle’s Circle Yield and Compound Labs’ Treasury product. But unlike BlockFi’s, those are institutional products only open to accredited investors.

The SEC has approved some other crypto products, in January greenlighting a stock exchange, BOX Exchange, which uses blockchain technology. It also last year approved two bitcoin futures ETFs, Proshares Bitcoin Strategy ETF and the Valkyrie Bitcoin Strategy ETF, but hasn’t approved any ETFs that invest directly in cryptocurrencies.

The SEC’s work is far from done. One question it will face in reining in crypto lending: How do you regulate something that is not a company? A lot of crypto lending is happening in Web3’s DeFi (decentralized finance), meaning it’s outside of the conventional corporate structures the SEC is used to dealing with.

Many crypto-lending services operate as decentralized protocols, with no one company controlling them. Individuals working on them are often based overseas and may not be U.S. citizens. Some of the protocols were originally started by a company, but governance of the protocol is often shifted to token holders. As a result, it’s unclear how the SEC could shut these products down, even if it wanted to.

Investors will go where yields are high. Despite the Fed’s signaling of rate hikes, rates for traditional savings accounts are still relatively low. There is now more than $200 billion in total value locked or deposited on DeFi services. More investors, including large institutional entities, are making bets on DeFi. One product, Aave Arc, allows institutional investors to invest in DeFi with whitelisted counterparties.

Regulators haven’t directly addressed DeFi products. However, the SEC has reportedly looked at some companies that helped start DeFi protocols, such as Uniswap Labs, the company behind decentralized crypto exchange Uniswap.

The downside of the emerging regulatory regime for crypto lending is that it may send the savviest investors looking for the highest yields from truly decentralized services, out of the reach of regulators. But the upside is that SEC scrutiny and the resulting stamp of approval may bring a broader base of financial consumers looking for trustworthy products into the mix.

Workplace

An IPO may soon be in Notion’s future

Notion COO Akshay Kothari says there’s room to grow, aided by a new CFO who knows how to take a company public.

Notion has hired its first chief financial officer: Rama Katkar.

Photo: Courtesy of Notion

It’s been a year since Notion’s triumphant $275 million funding round and $10 billion valuation. Since then the landscape for productivity startups trying to make it on their own has completely changed, especially for those pandemic darlings that flourished in the all-remote world.

As recession looms, companies looking to cut costs are less likely to spend money on tools outside of their Microsoft or Google workplace bundles. Enterprise platforms are bulking up and it could spell trouble for the productivity startups trying to unseat them. But Notion COO Akshay Kothari says the company is still aiming to build the next Microsoft, not be the next Microsoft. And in a move signaling a new chapter of maturity, Notion has hired its first chief financial officer: Rama Katkar, Instacart’s former VP of finance.

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Lizzy Lawrence

Lizzy Lawrence ( @LizzyLaw_) is a reporter at Protocol, covering tools and productivity in the workplace. She's a recent graduate of the University of Michigan, where she studied sociology and international studies. She served as editor in chief of The Michigan Daily, her school's independent newspaper. She's based in D.C., and can be reached at llawrence@protocol.com.

Sponsored Content

Great products are built on strong patents

Experts say robust intellectual property protection is essential to ensure the long-term R&D required to innovate and maintain America's technology leadership.

Every great tech product that you rely on each day, from the smartphone in your pocket to your music streaming service and navigational system in the car, shares one important thing: part of its innovative design is protected by intellectual property (IP) laws.

From 5G to artificial intelligence, IP protection offers a powerful incentive for researchers to create ground-breaking products, and governmental leaders say its protection is an essential part of maintaining US technology leadership. To quote Secretary of Commerce Gina Raimondo: "intellectual property protection is vital for American innovation and entrepreneurship.”

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James Daly
James Daly has a deep knowledge of creating brand voice identity, including understanding various audiences and targeting messaging accordingly. He enjoys commissioning, editing, writing, and business development, particularly in launching new ventures and building passionate audiences. Daly has led teams large and small to multiple awards and quantifiable success through a strategy built on teamwork, passion, fact-checking, intelligence, analytics, and audience growth while meeting budget goals and production deadlines in fast-paced environments. Daly is the Editorial Director of 2030 Media and a contributor at Wired.
Securing the Enterprise

Securing the enterprise

There’s no let-up in the surge of cyberattacks against businesses. But shutting down the hackers will require many enterprises to evolve their strategy.

In today’s enterprise, “identity and security are very merged.”

Illustration: iStock/Getty Images Plus; Protocol
the Protocol team
Protocol focuses on the people, power and politics of tech, with no agenda and just one goal: to arm decision-makers in tech, business and public policy with the unbiased, fact-based news and analysis they need to navigate a world in rapid change.
Fintech

How neobanks are helping consumers game credit scoring

The CFPB says it is closely monitoring secured credit cards offered by neobanks.

Regulators are scrutinizing neobanks' card offerings.

Photo: Oscar Wong/Moment/Getty Images

About one in six Americans has a credit score below 619, according to the CFPB. Another 23% have too thin a credit file to score or no file at all. That puts them in a credit trap: To build credit, these consumers need someone to give them a line of credit with which they can demonstrate good financial habits. But with scores that low, few lenders are prepared to offer them anything.

Neobanks say they can solve the problem through a new twist on secured credit cards. But regulators are already scrutinizing their offerings.

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Veronica Irwin

Veronica Irwin (@vronirwin) is a San Francisco-based reporter at Protocol covering fintech. Previously she was at the San Francisco Examiner, covering tech from a hyper-local angle. Before that, her byline was featured in SF Weekly, The Nation, Techworker, Ms. Magazine and The Frisc.

Policy

Steel decided World War II. Chips will decide whatever is next.

“Chip War: The Fight for the World’s Most Critical Technology” foreshadows the coming battle between nations over semiconductors.

“Chip War” outlines the nature of the coming battle over semiconductors, showing how the power to produce leading-edge chips fell into the hands of just five companies.

Image: Scribner; Protocol

“World War II was decided by steel and aluminum, and followed shortly thereafter by the Cold War, which was defined by atomic weapons,” Chris Miller, a professor at Tufts University’s Fletcher School of Law and Diplomacy, writes in the introduction to his latest book. So what’s next? According to Miller, the next era, including the rivalry between the U.S. and China, is all about computing power.

That tech rivalry and the story of how the chip industry got from four to 11.8 billion transistors are all part of Miller’s book, “Chip War: The Fight for the World’s Most Critical Technology,” which comes out Oct. 4. “Chip War” outlines the nature of the coming battle over semiconductors, showing how the power to produce leading-edge chips fell into the hands of just five companies: three from the U.S., one from Japan, and one from the Netherlands.

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Hirsh Chitkara

Hirsh Chitkara ( @HirshChitkara) is a reporter at Protocol focused on the intersection of politics, technology and society. Before joining Protocol, he helped write a daily newsletter at Insider that covered all things Big Tech. He's based in New York and can be reached at hchitkara@protocol.com.

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