US regulators are cracking down aggressively on the trading platforms that offer mouth-watering dollar-denominated interest rates on loans of crypto assets.
On Friday, Coinbase announced that it was discontinuing a plan to offer up to 50 times the prevailing rate on bank deposit accounts to clients offering to lend USDC, a dollar-denominated ‘stablecoin’ that promises to maintain a $1 value.
USDC has a market value of just under $30bn and has grown in size more than tenfold in the last year. Tether, the largest dollar-denominated stablecoin, has $69bn in assets.
USDC was first issued by a company called Circle in 2018. Circle, together with Coinbase, were founding members of a consortium called Centre, which oversees the stablecoin’s development.
In its pre-launch advertising Coinbase was promising interest rates of 4 percent on loans of USDC, while US bank savings accounts currently pay an average of 0.06 percent.
But earlier this month Coinbase disclosed it had received notice from the US securities market regulator, the Securities and Exchange Commission (SEC) about potential legal action regarding its proposed lending programme, called LEND.
In a series of tweets, Coinbase’s CEO, Brian Armstrong, accused the SEC of ‘really sketchy behaviour’ for having insisted that LEND qualified as a security under US law.
The regulator had argued that the loan programme should be subject to US securities laws, which govern all investment contracts sold to the public, Coinbase said.
During recent weeks, US state financial regulators have pursued two other crypto lending platforms—BlockFi and Celsius network—that are already in place. These pay even higher deposit rates than those promised by Coinbase for its now-ditched LEND scheme.
At least five US states have targeted New Jersey-based BlockFi’s interest-paying crypto offering. BlockFi promises up to 8 percent annual yield on clients’ pledges of cryptoassets, including various dollar-denominated stablecoins and other cryptocurrencies.
And Texas and New Jersey state securities regulators have accused Celsius network of failing to comply with local securities laws.
On Friday, the Texas State Securities Board said it would hold a hearing in February 2022 to decide whether to issue a cease and desist order against Celsius in the state.
Celsius had more than $24 billion in ‘community assets’ at the beginning of September, according to Bloomberg. The crypto lending platform promises interest rates of nearly 9 percent for deposits of dollar-denominated stablecoins, such as Tether and USDC.
US regulators’ crackdown on the crypto lending sector comes as a growing share of global credit is supplied by non-banks.
Earlier today the Bank for International Settlements (BIS) released new research showing that banks’ share of international lending business had declined steadily since the 2008 financial crisis, with loans by non-banks like asset managers taking up the slack.
The growth in such non-bank lending means that regulators have to take extra precautions to ensure adequate liquidity and transparency measures are in place, the BIS said.
With the dramatic rise of new crypto lending programmes, regulators are under even more pressure to ensure a level playing field between different types of financial intermediary.
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