What do car manufacturers have to do with crypto lending platforms? Consumers and investors deserve protection—that’s true of motor vehicles and investment vehicles alike.
In September 1966, President Lyndon B. Johnson signed the National Traffic and Motor Vehicle Safety Act. Nearly six decades later, seat belts and other basic safety features remain standard. That’s true despite many innovations in automotive technology. Whether a car runs on gasoline or electricity, drivers and passengers deserve to be protected.
Similarly, our federal securities laws, which President Franklin D. Roosevelt signed in the depths of the Great Depression, were designed to protect investors. There’s no reason to treat the crypto market differently from the rest of the capital markets just because it uses a different technology.
Recent market events show why it is critical that crypto firms comply with securities laws. In recent months, some crypto lending platforms have frozen their investors’ accounts or gone bankrupt. When it comes to bankruptcy, these investors have to get in line at the court.
Consider this hypothetical: Bob runs an app that promotes 4%, 7% or 19% returns. Alice and millions of other everyday investors put their assets in Bob’s app. Investors benefit from knowing what stands behind Bob’s claims that he will provide a certain return. If an investment sounds too good to be true, it may be. Alice gets to decide whether to invest based on those disclosures.
The disclosures help her understand what Bob is doing with her assets. Is he trading them? Is he lending them to other investors? Is he running a hedge fund? How is he funding the promised returns, and what risks is he taking?
Notably, it doesn’t matter what kind of asset Alice put into Bob’s app—cash, gold, bitcoin, chinchillas or anything else. It’s what Bob does that determines what protections are provided by the law.
Further, depending on how Bob uses Alice’s assets, he also might be operating an investment company, such as a mutual fund. In that case, Bob would have to provide additional protections that make it harder to defraud investors.
Bob can’t avoid complying with these time-tested investor protections by sticking a label on the product or on the promised benefits. He might call it interest, yield, earn or annual percentage yield rewards. He might say his app is a lending platform, a crypto exchange or a decentralized finance platform. Across decades of cases, the Supreme Court has made clear that the economic realities of a product—not the labels—determine whether it is a security under the securities laws.
That’s what the Securities and Exchange Commission found in a recent settlement with the crypto-lending platform BlockFi. The company had borrowed more than $10 billion in crypto assets from 570,000 investors, offering them a variable interest rate in return. That made its lending product offered to investors, called BlockFi Interest Accounts, a security. BlockFi then pooled these assets, packaged them into loans to institutional borrowers, and invested funds in other securities. That made it an investment company.
That BlockFi had borrowed crypto wasn’t the issue here. In fact, you could replace “crypto” with any other asset. The issue was what it did with the borrowed assets and what it didn’t do as a firm: provide the required disclosures to investors. Compliance with our laws protects the investing public. Unfortunately, some platforms that offer crypto lending aren’t complying with the applicable requirements.
We can dispense with the idea that crypto lending isn’t subject to regulation. On the contrary, the rules have been around for decades. The platforms aren’t following them. Noncompliance isn’t the inevitable result of the crypto business model or underlying crypto technology. Rather, it is as if these platforms are saying they have a choice—or even worse, saying “Catch us if you can.”
As I said in a speech last year, “Make no mistake: If a lending platform is offering securities, it . . . falls into SEC jurisdiction.” On many occasions, the commission and state regulators have addressed how the relevant case law implicates crypto assets, including crypto lending.
There are costs of complying with securities laws, just as there are costs to car makers of adding seat belts. Platforms that offer crypto lending need to comply anyway, not merely because that’s the law, but also because it helps protect investors and increase trust in our markets.
Fortunately, there is a path forward. I encourage platforms offering crypto lending to come in and talk to SEC staff. Getting these platforms into compliance with the securities laws will benefit investors and the crypto market.
In the meantime, the SEC will serve as the cop on the beat. As with seat belts in cars, we need to ensure that investor protections come standard in the crypto market.