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New York Gets Tough on Crypto Lenders. What it Means For Investors

New York Gets Tough on Crypto Lenders. What it Means For Investors
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Two cryptocurrency exchanges have been told to cease and desist while three exchanges need to answer detailed questions about their operations.

New York Attorney General Letitia James has taken action against five cryptocurrency lenders. The attorney general asked two platforms to stop working immediately and gave three more platforms until November 1 to answer questions about their activities.

“Cryptocurrency platforms must follow the law, just like everyone else, which is why we are now directing two crypto companies to shut down and force three more companies to answer questions immediately,” she said.

New York is not the only country to crack down on cryptocurrency lenders. Kentucky, Texas, Alabama, Vermont and New Jersey have all taken moves recently against similar operations as well. Moreover, the SEC has stopped cryptocurrency exchange Coinbase from launching its own lending product.

The Public Prosecutor’s Office did not reveal the names of the companies it targets. However, Bloomberg notes that Nexo and Celsius are in sight.

Nexo confirmed that it had received instructions to close its operations in New York. However, I argued that there was some kind of mistake because it does not offer any lending products in New York. According to a Bloomberg report, Celsius, who was asked to provide more information, declined to comment.

New York has some of the strictest cryptocurrency trading rules of any US state. The BitLicense regulation passed in 2015 means that any company that wants to buy, sell, store or issue virtual currency will need a license. These companies need to comply with Know Your Customer and Anti-Money Laundering rules. They can only trade a limited number of cryptocurrencies.

What are cryptocurrency lending products and why do the authorities want to shut them down?

Cryptocurrency lending products allow customers to take out loans using crypto as collateral. The platforms use the interest from those loans to pay high rates to investors who deposit money. These can be more than 10 times the rates you’ll find with traditional savings accounts, but the products come with much more risk.

This week’s move fits with what we’re seeing at the state and national levels. Authorities view these products as securities and want more control over how they work. The argument from the Securities and Exchange Commission is the same as the one used by the New York attorney general in his cease-and-desist letter: If a product promises a rate of return to investors and uses trading or lending to generate those returns, it is a guarantee. . There are strict rules about who can sell securities and what rules they must follow.

The three platforms that were asked to answer detailed questions about their operations. They will need to provide the following, along with other information:

  • A list of all clients or accounts in New York with a spreadsheet containing all logins from New York.
  • Details about lending products and interest such as rates, fees, and collateral requirements.
  • Information on how assets are held, including participating third parties.
  • Complete information on any transactions with the stablecoin (USDT), including any agreement with Tether and a list of users who have used USDT.

The questions show that New York authorities want to understand whether these platforms have given state residents any exposure whatsoever to unauthorized products.

Also worth noting are questions about interactions with Tether. Stablecoins are cryptocurrencies whose value is tied to a traditional commodity, such as the US dollar. Fiat-backed stablecoins like Tether are supposed to be backed 1:1 by non-crypto reserves. This way, if a lot of people want to withdraw USDT at the same time, they will be able to do so. The concern is that this may not be the case for Tether.

In February, New York banned the well-known stablecoin after an investigation showed that Tether was not always fully backed by the US dollar. In addition, federal lawmakers are currently deciding how to regulate stablecoins and whether they pose a threat to the broader financial system.

What cryptocurrency investors need to know

It is important to read the terms and conditions before depositing money into any of these lending platforms. Make sure you understand what will happen to your money in the event the exchange has to stop serving it. High interest rates are attractive, but you may find that your money is not as safe as with traditional banks.

Investors are also advised to avoid platforms that are not licensed to operate in their state. Some people use VPNs to access exchanges that might otherwise be restricted. Although this can be tempting when you want to access a better savings interest rate or buy a certain currency, it comes with significant risk.

If your state strengthens its regulatory oversight like New York, you may find your assets frozen. Or worse, the platform may shut down completely. Even if this doesn’t happen, if you run into problems with a service you should have been using, you’re not likely to get much help from the local authorities. Investing in cryptocurrency is risky enough without coloring outside the lines.

Finally, with Tether’s practices under fire from all directions, it would be wise for investors who own USDT – in New York and elsewhere – to move their assets into another currency. There are many alternative stablecoins that do not have question marks hanging over their trading activities and carry much less risk.

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