Crypto Lending - Regulations Good Or Bad?

Did you hear about the recent fine that blockfi has to pay? They were ordered to pay around 100 million dollar fine to the SEC. This is just one of many steps against crypto by the SEC as they want regulate the crypto space, especially the exchanges who are offering lending products. This is a big problem because the SEC labeled these products as securities. As a reaction to that there will come big changes towards us, especially toward those who have a crypto lending and borrowing account. With this being said, it will not be just BlockFi but companies such as Coinbase or Celsius are also involved in this. In this article I want to talk about the reasons and the potential effect this could have on the crypto market.

Current Situation

So what is happening right now? Recently, BlockFi announced that any new assets will no longer be eligible to earn any interest. This is currently only valid for the United States but this does not mean that other countries are thinking about the same move in the future. It does not mean that BlockFi accounts will get deleted, it just means that any new crypto that is bought or transferred will not be able to earn any interest. This is also true for any new accounts and also for crypto that has been withdrawn from the interest paying account to the trading account on BlockFi. This sound very bad in the beginning but we have to ask our selves why this is happening?

Reasons For This Move

These crypto exchanges have become very popular over the past few years. The reason for that is certainly the up to 10% APY that is being offered to lend out some of your crypto assets. This return is insane considering that the stock market only returns around 7% per year. With that being said, how are these companies doing this? According to their business plans they are charging their clients even higher interest rates. These clients are most likely big institutions who can afford borrowing this much crypto and probably have a proper business plan behind it. The problem with that is that it nowhere officially presented who the customers are.

This situation is great as long as the crypto market is doing well and the demand and FOMO for crypto is present. In these times liquidity is high as everybody tries to get into this. But what about the other side, the dark bearish side that nobody wants to think of? If crypto enters a bear market the demand for crypto will naturally fall through the floor and demand will decrease by the second. This situation is what the SEC is worried about and I will tell you why.

Lets assume that tomorrow a new law gets passed that forbids every kind of crypto lending completely. This will most certainly trigger a big sell off as a lot of investors in crypto are basing their business model around this lending feature. Without this feature a lot of business models won’t work, hence the big sell off to cut losses. The real problem comes with stable coins. Once the lending is forbidden a lot of people will want to liquidate their stable coins to dollars again. This brings a very high risk that too many people want to liquidate their crypto. With this happening stable coins won’t be pegged to the dollar anymore causing a really big thread to the crypto space. This is because not every stable coin is immediately replaceable by a dollar as a lot of companies like Theter are holding different assets as collateral. In a nutshell, this would mean that investors will lose a lot of purchasing power.

Conclusion

This is why the SEC wants to step in and protect investors so that do not get screwed by a situation like mentioned before. As we all know the crypto space is not regulated yet. And while many think that regulation is bad, some sort of regulations should always be there. What is also important to mention is that I don’t think that a situation exactly like this will happen. I do not think that lending will be ever completely forbidden but regulations such as showing exactly what backs the exchange products is very important in my eyes as these exchanges are developing themselves into big financial institutions.

Published by ga38jem on
LeoFinance
On 16th February 2022

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