If you are holding any of your crypto assets in a lending and borrowing crypto wallet app like Celsius, Nexo, or BlockFi, you may have heard the news in recent days. Three US state securities regulators have filed ‘cease and desist’ or ‘show cause’ notices against a popular crypto wallet app.
If you’re using or thinking about using these types of apps, should you be worried?
Let’s take a look at what has happened with state securities regulators and what it means for your crypto.
Who are US State regulators targeting now?
In one word – BlockFi.
Three US states – New Jersey, Texas and Alabama – have filed cease and desist orders, or at least provided notice of their filing, in the last week. All filings have been against BlockFi.
You can take a look at the latest action by the Texas State Securities Bureau here.
The main gripe of regulators is their concern that BlockFi’s Interest Account (BIA) product is a security under state rules but is not registered as such.
If the filings are successful BlockFi will be banned from offering interest bearing crypto accounts in each of those states until their interest account is properly registered. That in turn raises the question of how likely it is that BlockFi would meet the requirements of securities registration. Would they be approved?
The allegations will need to be heard by a judge in coming weeks.
BlockFi’s official response to the fillings has been to asset the legality of their interest accounts in those states:
What is BlockFi?
BlockFi is a lending and borrowing platform for cryptocurrency assets. It offers one of the most popular interest accounts for cryptocurrency assets. BlockFi pools the assets that customers lend to it and pays interest on those assets. It generates interest by lending those assets on to trusted institutional and corporate borrowers.
BlockFi’s interest account (the product under scrutiny) is their flagship offering. They also provide customers with a trading account product and crypto-backed loans.
How does this impact BlockFi crypto wallet app customers?
State regulators have expressed that these regulatory actions are meant to protect retail investors, although in reality they are likely to be causing some concern. The Texas regulator has said BlockFi has at 25,000 clients in Texas with $691 million in total assets. That’s no small deal and it’s just one of the states in question.
If they are successful, the filings will only directly impact new BlockFi customers who are residents of Alabama, Texas and New Jersey. In fact, BlockFi has already been required to stop taking new customers for this product in these states until the matter is resolved.
That said, if the filings are successful they may set precedents for other states. At a minimum we can expect other state securities regulators to take a closer look at BlockFi.
What is the impact on other crypto wallets like Celsius and Nexo?
We’re sure the Celsius and Nexo teams will be watching with keen interest what is going on. But there’s no need to panic. These platforms should have their lawyers advising on any implications and will have a head start on BlockFi in terms of formulating a response and getting a head start on preparing for registration applications. That’s assuming registration is required. In short, there’s still a long way to go before state regulators move on to other platforms.
Should you be withdrawing your crypto from BlockFi?
If you’re a resident of one of these three states it might be safest to withdraw your assets and wait it out until the judge has ruled. If you’re worried out losing out on interest earnings then take a look at our review of Celsius Wallet here. Celsius is a competitor to BlockFi and offers the same sorts of products and interest rates.
If you’re not a resident of Texas, Alabama or New Jersey you should keep an eye on how these cases play out. Pay attention to whether other state regulators make similar moves in a domino effect. If this begins to happen, perhaps consider getting your crypto out.
If you’re not a resident of the US, then you’re not impacted so there’s no need to worry.
What can you do to manage regulatory risk to your crypto assets?
Regulatory risk is material in crypto because its such a new asset class and operates differently to any other financial products in the market. Law makers are still trying to classify different crypto product offerings. Until they do, we can’t really expect crypto platforms to comply with laws that may or may not apply to their products.
So how should you protect yourself?
Diversify your assets across crypto wallet apps. If you want to earn interest on your crypto don’t put all your eggs in one basket (or one crypto wallet app!). There are three or four large providers in this space all offering similar interest rates on Stablecoins and major cryptocurrency. We’ve listed these below. Our recommendation if you are worried about regulatory risk would be to split your assets across them. This can also help protect your coins from cyber attack and hackers attacking your wallet.
Hopefully, as regulators take an interest in this space and laws begin to be applied, existing customers will be grandfathered and providers will remain committed to their customer’s assets.
But in crypto its always best to protect your assets yourself.