Investors frustrated with minuscule yields from banks savings accounts have found a would-be savior: so-called crypto lending accounts that can pay interest rates of 9% or higher. Upstart crypto firms like Celsius Network and BlockFi Inc. think the accounts could be the killer app that brings a whole new cohort of investors into cryptocurrencies; thus far, the firms say they’ve collected more than $35 billion in deposits. But the accounts are also drawing criticism from traditional financial firms, who say they’re riskier than they appear, and from some regulators, who claim the accounts are being offered illegally. The conflict could push questions about regulation and crypto’s place in the U.S. financial system to a head.

1. What is crypto lending?

At first blush, crypto lending accounts look a lot like savings accounts offered by banks, but with cryptocurrencies instead of traditional money. An investor opens an account, deposits cryptocurrency and earns interest. Many deposits come in the form of Bitcoin, while other investors use stablecoins, tokens whose price is often pegged at $1 while others use lesser-known cryptocurrencies that have wide price fluctuations. The firms typically pay interest in the same currencies that are deposited. Some accounts have rates that change daily, while others get a fixed rate while the money is locked up for a fixed time, as with a certificate of deposit.

2. How can this offer such big returns?

The firms that offer the accounts say that they’re able to lend customers’ deposits to institutional investors at even higher rates. The institutions sometimes need to borrow crypto to execute their own trades, such as to bet that the price of crypto will fall or to take advantage of price differences in other financial instruments. But regulators have said they believe some crypto lending firms are using the money for other business activities. The bottom line is that there aren’t uniform disclosures on what exactly the deposits can and can’t be used for. 

3. How does it compare with regular bank products?

Crypto lending accounts typically carry yields that dwarf those of traditional bank accounts. While the average bank savings rate was 0.06% at the end of August, for example, Celsius Network says it can pay 8.88% on deposits of some U.S. dollar-backed stablecoins. 

4. How big is crypto lending?

The business of offering the accounts is big and has been growing fast. Celsius, one of the largest such companies, says it has more than $20 billion worth of deposits. BlockFi Inc. says it has more than $10 billion. Gemini Trust Co. began offering accounts in February and says it has more than $3 billion in deposits.

5. How does it fit into the crypto world?

While Bitcoin trading is seen as volatile and risky, companies offering interest accounts say they’re a steadier source of returns for investors. Celsius and BlockFi, as well as competitors like Gemini, deal directly with their customers and pay them interest, throwing them in the bucket of “centralized finance.” Some investors have earned similar yields by lending their deposits through “decentralized finance,” or DeFi, protocols, where computer code, rather than an intermediary, manages the interest payments. Lending out crypto to earn interest via DeFi is sometimes called yield farming.  

6. What are regulators doing?

Few of the firms offering the accounts have sought approvals from federal regulators, and that’s led to a heavy backlash this year. In July, securities regulators for Alabama, Texas, New Jersey, Kentucky and Vermont brought actions against BlockFi alleging that the company was offering unregistered securities. Several of the same states brought actions against Celsius Network in September. Coinbase Global Inc. planned to offer similar accounts but dropped that proposal after the Securities and Exchange Commission told the company it might sue.  

7. What are the dangers for consumers?

Regulators and investor advocates are most worried that consumers don’t understand that they’re taking on much more risk than they would in a bank savings account. Because the crypto accounts aren’t insured, customers can lose their deposits if a firm goes bust, is hacked, or otherwise loses its customers’ funds. 

8. What does this conflict mean for the broader crypto world?

Regulators appear to believe the crypto lending accounts are some of the lowest hanging fruit in their bid to bring some law and order to the crypto world -- after all, with firms like Celsius and BlockFi there’s a clear entity to sue, rather than just some computer code as in some DeFi transactions. The moves against the firms could be just the start of a broader crackdown. In years past, the SEC more or less put an end to a boom in what were known as initial coin offerings, or ICOs, by entrepreneurs hoping to launch the next Bitcoin, when it ruled that most counted as securities -- endeavors where investors pool funds and get returns that depend on the actions of others. 

9. What happens if crypto accounts are deemed securities?

That designation opens the firms up to an entire new regime of registrations and disclosure requirements. That could bring more investor protection to the space, but it also probably means higher costs for the crypto firms, and possibly the end of such outsize returns for investors. Leaders of crypto lending firms dispute that their products are securities and say that federal agencies need to give them guidelines on how to stay within the bounds of the law rather than bring lawsuits, as the SEC threatened to do against Coinbase.

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