The California Department of Financial Protection and Innovation (DFPI) is investigating offerings of interest-bearing crypto-asset accounts as a part of a broader scrutiny against cryptocurrency lending platforms.
The state regulator did not accuse any crypto firms of any wrongdoings or brought charges yet. Rather, the DFPI is checking if their DeFi and lending products should be registered as securities.
“The Department warns California consumers and investors that many crypto-interest account providers may not have adequately disclosed risks customers face when they deposit crypto assets onto these platforms. Crypto-interest account providers are not governed by the same rules and protections as banks and credit unions, which are required to have deposit insurance,” the DFPI said.
The securities regulator also stated that it’s scrutinizing Voyager Digital, the Canadian crypto investments firm, and BlockFi over its offering of interest-bearing crypto accounts. The department found that certain crypto-interest accounts were unregistered securities.
“The purpose of securities registration, in part, is to ensure that investors receive all material information needed to evaluate whether to enter into these crypto-interest account arrangements, such as risks being taken with deposited funds,” it added.
Crypto lenders fall under microscope
The effort continues a yearlong battle by California and other state watchdogs to bring crypto interest accounts under their regulatory domain. BlockFi was the first lender to fall under their microscope and it ultimately settled with state and federal regulators.
The crypto lending platform, backed by billionaire Mike Novogratz’s Galaxy Capital, settled last month with Iowa regulator for an administrative fee of $1 million without admitting or denying the charges. BlockFi also agreed to pay a $50 million penalty to the SEC and additional $50 million in fines to 32 states to settle similar charges.
The move comes as US regulators signaled a big change in policing cryptocurrencies and the growing Defi sector after they blocked Coinbase from launching a new crypto lending product. The SEC officials have increasingly been talking about a need to crack down on these products, which are essentially unregistered interest-bearing accounts, the agency claims.
Before the recent crisis, the use cases presented by major players reflect that the lending trends are shifting to a reliance on digital assets to support business’ operations rather than for only betting on the short term price moves. Specifically, there was substantial interest from the institutional players to borrow in order to facilitate a specific strategy such as for shorting, arbitrage, or working capital purposes.
SEC’s head Chair Gary Gensler called on Congress to give the agency more authority to better police crypto trading and lending platforms, which pay customers rates higher than most bank savings accounts.