Several states in the United States, including Kentucky, Texas, Alabama, Vermont, New Jersey, and most recently New York, have begun cracking down on crypto loans. Depending on your perspective, these can become acts of collective despair or premonitions of future events.

When asked about the crackdown by crypto lenders like BlockFi and Celsius, Firat Cengiz, a senior law lecturer at the University of Liverpool, told Cointelegraph, “The crypto regulatory space is getting hotter, not just in America, but also in America to other countries in the world. “She added that a new approach to regulation is emerging and, as such,” the crypto market will cease to be an example of a free market fully regulated by the ‘invisible hand of the market’. ”

“DeFi and stablecoins – instead of exchanging or storing coins of value like BTC or ETH – will be the main targets of the emerging regulations,” continued Cengiz. “For example, draft EU regulations would ban interest rates on stablecoins,” some believe that most financial institutions and central banks are facing challenges.

But Cengiz doesn’t have to meet with the New York attorney general in mid-October Closure of two unnamed crypto lending platforms operates under the status of “illegal activity” in the context of this global trend. “New York State has attempted to take a political stance in the past by targeting crypto,” she said. Meanwhile, others noted that James is likely to run for governor of the state, so almost everything she does currently has a political advantage.

Is lending in cryptocurrencies legal?

New York State isn’t the only one raising eyebrows about crypto lending, however. Alabama, Kentucky, New Jersey, and Texas have cease and desist orders against New Jersey-based crypto lender BlockFi Inc. in July and degrees Celsius in September. Both were accused of having provided “unauthorized unregistered securities in the form of high-interest accounts to finance credit and trading transactions”.

Investors often fail to realize that the 8-9% return they get on their crypto deposits – at a time when the savings rate with traditional banks is less than 1% – comes with some risk, meaning that all of their funds can be destroyed by the managers if the project is attacked or collapsed.

“You’re right,” Lee Reiners, executive director of the Center for Global Financial Markets at Duke University Law School, told Cointelegraph. “The marketing of many of these profitable products makes it look like a guaranteed return savings account when in reality it isn’t.” Nor do they come with FDIC coverage like traditional bank savings accounts.

Others have claimed that (sometimes) double-digit rates on crypto deposits cannot be sustained during times of sharp declines in cryptocurrency prices, and especially in bear markets. That is, they are just “artifacts of an artificially inflated crypto market,” as Kevin Werbach told Roll Call.

“The profit has to come from somewhere, of course,” said Reiners, a former Federal Reserve Bank of New York overseer, adding:

“When you borrow crypto to a DeFi protocol or a centralized company, what are they going to do with it to get the 8% or 9% interest rate that you get? Well, they only use it to trade other coins that are profitable when the market goes up. But when crypto prices fall, those returns will not be sustained. “

Regulators are struggling to keep up

Anne Timent, Investigative and Government Enforcement Partner at Bracewell LLP and former chief attorney at the Commodity Futures Trading Commission (CFTC), says there are no simple answers to the money invested in the crypto space is now driving the regulatory dialog box is advancing at a faster pace, telling Cointelegraph:

“In every industry, innovation comes first and regulation comes later. What is happening here is that innovation is happening at such a pace that regulators are struggling to keep up. “

Regarding lending questions, some in the crypto community argued, “Just because we offer a better product than the banks can offer doesn’t make us better.” Illegal … “She added. And not all crypto protocols should use the same brush The big players in this area are often quite demanding companies that take consumer protection seriously, added T Regier.

When asked if managers think a savings rate of 8-9% is too good to be true, Cengiz replied. “Yes, of course there are undeniable shortcomings in consumer protection on the crypto market.” From a regulatory point of view, it remains unclear to what extent lending or borrowing via a decentralized financial protocol (DeFi) counts as a financial contract within the meaning of consumer protection regulations.

“However, the answer to this issue should not be based on highly political individual cases, but rather take legislative measures in order to give clear and appropriate regulatory guidelines to consumers as well as consumers and suppliers. I find it difficult to categorize the types of individual measures you mentioned as actually derived from consumer protection incentives. “

The Reiners, for their part, have little patience with a position in which prosecutors like Letitia James are only trying to score politically or to protect old banks. “The crypto community always acts like they are the victim when something like this happens, when in reality the regulators are just doing their job and enforcing the law.” France. And honestly, I don’t know what happens after crypto companies get “political points”. It’s not that there is an anti-crypto lobbyist out there who has the votes it needs to have. ”

“A dangerous game”

“There’s nothing new under the sun,” Geoffrey Goodell, research fellow at University College London and associate director of the UCL Center for Blockchain Technology, told Cointelegraph. “Companies look for capital and investors for profits. In this case, companies use custodian language to indicate a lack of security while avoiding traditional regulatory barriers to such activity. “He added that the situation is becoming a” dangerous game that we have seen many times “, as investors strive to make lots of money.

Laura Gonzalez, an associate professor of finance at California State University in Long Beach, told Cointelegraph, “The problem with any cryptocurrency that isn’t central bank backed is its volatility and the potential for volatility. “There is a significant tradeoff between risk and return,” she added, and investors should be careful when entering the sector.

Others have suggested that regulators, by tracking companies like Celsius, BlockFi, and others, simply capture the low fruits. It can be more difficult to stop decentralized loan projects for which no person or company is clearly responsible.

Cengiz acknowledged that decentralized platforms can create “significant problems and complications” for enforcement agencies, including determining which jurisdiction will conduct the investigation, deciding on applicable law, and identifying individuals responsible for:

“Successful enforcement of decentralized platforms requires a very strong international network between enforcement authorities that we have not seen in any other area of ​​law.”

“But sometimes crypto platforms make themselves the target of legislation by ignoring regulatory advice,” added Cengiz. An example: The British Financial Conduct Authority (FCA) has ordered Binance to cease all operations because Binance does not require FCA approval “according to very clear regulatory guidelines”.

A global rule dialog

“We see a lot of movement between the governments, not only at the federal level, but worldwide and certainly also at the state level,” said Tigure. “The crypto community asks: Can we work on it together?”

Is the same debate taking place in other countries? Tfact has said “Absolutely possible” all over the world, and particularly in relation to the Bank of England (BOE). Their deputy governor, Jon Cunliffe, drew a comparison between the current crypto boom and the surge in US subprime mortgages in 2008 just before the financial crash.

In fact, the market value of cryptocurrencies, which hit $ 2.5 trillion in mid-October, is almost double what the subprime market was worth in 2008 – $ 1.2 trillion – this shows that “you don’t get a big one Must be part of the financial sector ”. for Cunliffe to say.

Taction views the comment from the BOE’s Deputy Governor as a prime example of the growing “enthusiasm” among regulators around the world for dealing with cryptocurrencies. Cengiz told Cointelegraph:

“Regulators don’t seem to fully understand the dynamics …