Crypto’s Rapid Move Into Banking Elicits Alarm in Washington

As the company has expanded, regulators have become increasingly concerned. New Jersey’s attorney general sent it a “cease and desist” letter in July, saying it sells a financial product that requires a securities license, with all the associated obligations, including mandated disclosures.

“No one gets a free pass simply because they’re operating in the fast-evolving cryptocurrency market,” the acting attorney general, Andrew J. Bruck, said.

BlockFi does not adequately notify customers of risks associated with its use of their cryptocurrency deposits for borrowing pools, including the “creditworthiness of borrowers, the type and nature of transactions,” officials in Texas added in their own complaint, echoing allegations made by state officials in Alabama, Kentucky and Vermont.

Zac Prince, BlockFi’s chief executive, said that the company was complying with the law but that regulators did not fully understand its offerings. “Ultimately, we see this as an opportunity for BlockFi to help define the regulatory environment for our ecosystem,” he wrote in a note to customers.

Breaking the Banking Mold

The regulatory challenge is even greater when it comes to other emerging crypto finance developers in the world of DeFi, such as Compound, SushiSwap and Aave as well as PancakeSwap.

They are all essentially automated markets run by computer programs facilitating transactions without human intervention — the crypto-era version of trading floors. The idea is to eliminate intermediaries and bring together buyers and sellers on the blockchain, the technology behind cryptocurrency. The sites do not even collect users’ personal information.

Founders of those kinds of platforms argue that they are just building a “protocol” ultimately led by a community of users, with the computer code effectively running the show.

Article source: https://www.nytimes.com/2021/09/05/us/politics/cryptocurrency-banking-regulation.html