US Crypto Lending Firms to See more Regulation after Celsius Freeze

IGI Markets

The cryptocurrency sector has already been under a lot of regulatory pressure in the United States this year and it had already gone on the defensive last month, after two tokens in the market worth $60 billion were wiped out. The pressure is about to go up because of Celsius Network, a crypto lending platform that appears to be having liquidity troubles. The announcement from the company about freezing its withdrawals, swaps and transfers has left 1.7 million customers of the platform unable to access their funds.

Increased Scrutiny for the Industry

The start of the year saw the cryptocurrency industry come under scrutiny after Russia invaded Ukraine in February and sanctions were imposed for this action. There were concerns that the country was using digital assets to evade sanctions. Then, in May, when the TerraUSD stablecoin imploded and took down the LUNA token with it, the entire market plunged and this gave rise to worries of systemic risks.

Other problems that exist in the crypto space have also come into the light after the decision of Celsius Network to freeze its withdrawals. It shows that the investor safeguards in the industry are weak, as the New Jersey-based firm was able to take the decision without warning its clients, or any other issue. It simply cited the extreme conditions of the market as reason for its decision.

Regulators are Investigating

After the announcement of the decision by the company, securities regulators in different states of the US, such as New Jersey, Kentucky, Alabama, Washington and Texas launched an investigation into it. This was disclosed by the Securities Board’s Director in Texas.

According to crypto executives, the problems in the crypto industry show that regulatory authorities have been too slow when it comes to providing the clarity needed for protecting the people. However, they added that things are likely to change quickly now because the consequences of neglecting the industry have turned out to be rather disastrous.

Market analysts added that the recent events in the crypto industry would probably speed up the regulatory process and clearer policies would be developed for the industry and those who invest in it. On Thursday, an official of the US Treasury said that the turmoil in the crypto space indicates that regulatory frameworks are needed urgently for reducing the risks associated with digital assets.

Popularity of Crypto Lenders

Crypto lending platforms ask retail customers to deposit their crypto funds, which are re-invested. These platforms often tout returns in double digits due to which they are able to attract tens of billions of dollars worth of deposits. However, when the crypto market slumped, Celsius was unable to redeem its clients.

Since the deposits are not insured because of lack of regulation, this puts Celsius in a bind. As the company was not registered with the Securities and Exchange Commission (SEC), it meant that they had not implemented any such risk management policies, or disclosure or capital rules. Therefore, customers did not know how their funds were invested and don’t know if they will be able to get them back.