New York is getting tough on crypto lenders. What this means for investors
Two crypto exchanges have been ordered to cease and desist while three must answer detailed questions about their operations.
New York Attorney General Letitia James just took action against five crypto lending companies. The attorney general asked two platforms to immediately cease their activities and gave three others until November 1 to answer questions about their activities.
“Cryptocurrency platforms have to follow the law, like everyone else, which is why we are now ordering two crypto companies to shut down and forcing three more to immediately answer questions,” she said.
New York isn’t the only state cracking down on crypto lenders. Kentucky, Texas, Alabama, Vermont and New Jersey have also taken recent action against similar operations. Additionally, the SEC has blocked popular crypto exchange Coinbase from launching its own loan-income product.
The attorney general’s office did not disclose the names of the companies involved. However, Bloomberg noted that Nexo and Celsius are in his sights.
Nexo has confirmed that it has been instructed to close its operations in New York. However, he argued that there had been some sort of error because he did not offer any loan products in New York. According to the Bloomberg report, Celsius, who was asked to provide more information, declined to comment.
New York has some of the strictest cryptocurrency trading rules of any state in the United States. The BitLicense regulation it passed in 2015 means that any business wishing to buy, sell, store, or issue virtual currency would need a license. These companies must comply with know your customer and anti-money laundering rules. And they can only trade a limited number of cryptocurrencies.
What are crypto loan products and why do the authorities want to shut them down?
Crypto loan-income products allow customers to take out loans using crypto as collateral. The platforms use the interest on these loans to pay high rates to investors who deposit money. These can be more than 10 times the rates you’ll find with traditional savings accounts, but the products come with a lot more risk.
This week’s move is what we’re seeing at the state level and at the national level. The authorities consider these products to be securities and want more control over their operation. The SEC’s argument is the same one the New York attorney general uses in his cease-and-desist letter: whether a product promises a rate of return to investors and uses the trade or loan to generate those returns. , this is a security. There are strict rules about who can sell securities and what rules they must follow.
The three platforms that were asked to answer detailed questions about their operations. They will need to provide the following, as well as other information:
- A list of all customers or accounts in New York with a spreadsheet containing all connections from New York.
- Details on loan and interest payment products such as rates, fees and collateral requirements.
- Information on how assets are held, including third parties involved.
- Complete information on all transactions with stablecoin Tether (USDT), including any deal with Tether and a list of users who have used USDT.
The questions show that New York officials want to understand whether these platforms have exposed residents of the state to unauthorized products.
Questions about interactions with Tether are also worth noting. Stablecoins are cryptocurrencies whose value is tied to a traditional commodity, such as the US dollar. Fiat-backed stablecoins like Tether are said to be supported 1: 1 by non-crypto reserves. This way, if a lot of people want to withdraw their USDT at the same time, they will be able to do so. The concern is that this is not the case for Tether.
In February, New York banned the famous stablecoin following an investigation which showed Tether had not always been fully backed by US dollars. Additionally, federal lawmakers are currently deciding how to regulate stablecoins and whether they pose a threat to the broader financial system.
What cryptocurrency investors need to know
It is important to read the terms and conditions before depositing any money on any of these lending platforms. Make sure you understand what will happen to your funds if the exchange is forced to stop serving. High interest rates are attractive, but you may find that your money is not as secure as it would be with a traditional bank.
Investors would also be well advised to avoid platforms that are not licensed to operate in their state. Some people use VPNs to access exchanges that would otherwise be restricted. As tempting as it may be when you want to access a better savings interest rate or buy a specific coin, it comes with significant risk.
If your state steps up its regulatory oversight like New York has done, you may find that your holdings have been frozen. Or worse, the platform can be completely closed. Even if that doesn’t happen, if you’re having trouble with a service that you shouldn’t have used, you’re unlikely to get much help from the local authorities. Crypto investing is risky enough without coloring outside the lines.
Finally, given that Tether’s practices are criticized from all quarters, it would be prudent for investors who hold USDT – in New York and elsewhere – to switch their assets to another currency. There are several alternative stablecoins that do not have question marks about their trading activities and are much less risky.