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US states clamp down on Celsius Network’s crypto yield products

Newsletter: Unhedged

Authorities in New Jersey and Texas are pursuing actions against cryptocurrency group Celsius Network for allegedly offering unregistered securities, as regulators crack down on issuers of digital asset lending products. 

The US state of New Jersey’s attorney-general’s office on Friday ordered the company to stop issuing interest-bearing cryptocurrency products via a cease-and-desist order. Texas state regulators filed a notice seeking a hearing in February to assess whether to take similar action.

Both argued that the company’s interest-bearing crypto accounts, known as Celsius Earn, constitute an unregistered securities offering.

The New Jersey regulator added that the company had been “funding its cryptocurrency lending operations and proprietary trading at least in part” through the sale of these unregistered securities, which it said had raised more than $14bn for Celsius, which is based in the city of Hoboken, New Jersey.

“Financial companies operating in the cryptocurrency marketplace are on notice,” Andrew Bruck, the state’s acting attorney-general, said on Friday. “If you sell securities in New Jersey, you need to comply with New Jersey’s investor-protection laws. Companies dealing in cryptocurrencies are not immune from oversight.”

Crypto platforms providing interest on digital assets have gained in popularity thanks to the substantial yields on offer. Celsius, one of the largest lenders with more than 100,000 US interest-bearing accounts, advertises 8.8 per cent annual interest on deposits of digital coins tied to the US dollar, alongside other tokens.

Crypto lending products are now facing a regulatory backlash. Agencies in five states — Alabama, Kentucky, New Jersey, Texas and Vermont — are pursuing similar actions against BlockFi, a lending group that has raised $14.7bn by offering interest-bearing crypto accounts. BlockFi denies the claims. 

Coinbase, the largest US cryptocurrency platform, revealed last week that the US Securities and Exchange Commission had warned that it would sue the company if it pursued its plans to launch Lend, a new digital asset yield product of its own. 

Meanwhile, Gary Gensler, SEC chair, told a Senate committee on Tuesday that crypto markets lacked adequate consumer protections, “particularly the lending”, as bipartisan momentum for more industry regulation gathers steam. 

State and federal regulators argue that these crypto lending products can be defined as an “investment contract”, making them a security and requiring issuers to undergo formal registration and post additional disclosures.

But many in the crypto community deny that interpretation, arguing that regulators have failed to provide sufficient clarity on the matter.

In an interview with the Financial Times last week, Alex Mashinsky, chief executive of Celsius, said he was “very confident” that none of Celsius’s products in the US were securities. Celsius did not immediately respond to a request for comment on Friday. 

Celsius has historically been based in the UK, but in June it said it would be moving its main business activity and headquarters to the US and “where applicable, to several other jurisdictions”. 

The Texas State Securities Board said it notified Celsius in May that it might be breaking state securities law and to explain the legal requirements. The board said Celsius did not stop offering its lending products after receiving the warning. 

Celsius has said it generates its crypto yields through lending and cryptocurrency mining, but state regulators said the company also engaged in proprietary trading and other types of transactions.

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